The Causal Effect of Access to Finance on Productivity of Small and Medium Enterprises in Vietnam

In many developing countries, obtaining financial services at affordable rates and fair terms has been a significant challenge for small and medium enterprises (SMEs). However, this issue has not been paid much attention in Vietnam, even though SMEs account for about 95% of total enterprises and the financial market of the country has not been well developed. This study investigates the causal effects of access to finance on productivity of SMEs operating in the manufacturing sector in Vietnam. Productivity was measured as the total factor productivity (TFP) obtained by production function estimation using the Levinsohn and Petrin approach. Regarding financial accessibility, two factors covered the extent to which firms might have a bank loan or overdraft facility were employed. To study the causal inferences of access to finance on firm productivity, the research adopted the difference-in-differences (DID) approach, as well as the propensity score matching (PSM) coupled with DID technique. The empirical results indicated that improving the financial accessibility could directly enhance firm productivity. Particularly, it was shown that firms having access to a bank loan could significantly improve TFP by approximately 8.6% in the DID model and about 9% in the PSM-DID model. Meanwhile, the firm average TFP increased by approximately 12.3% and 15.7% in simple DID and PSM-DID models, respectively, when firms had an overdraft facility. These findings suggest that the government should put more effort into assisting SMEs in generating bankable projects, and create a sound and healthy financial environment to stimulate firms’ access to finance, which will ensure their sustainability and growth.