Subnational Governance Institutions and The Development of Private Manufacturing Enterprises in Vietnam

Abstract

This paper examines the impacts of subnational governance institutions on the development of private manufacturing firms in terms of new entry, firm size and labor productivity growth during 2006-2014 in Vietnam. Vietnam’s context during this period provides the best opportunities for examining the effects of subnational institutions on the entry and growth of private firms, given vast differences in the institutional quality across provinces and the increasing contribution of the private sector to the national economy. The empirical results suggest that aspects of the provincial governance institutions differ significantly in terms of their effects on private firms’ entry and growth during the study period. The conventional approach of entry deregulation seems to not induce the entry and sustained growth of private firms, but more fundamental aspects of transparency, private property protection, and contract enforcement better serve the private sector development over longer time horizons. These findings have important implications for the next stage of institutional reforms in a transitional economy such as that of Vietnam.