How do business practices affect micro and small firms’ performance in a low-income economy? An analysis using dynamic panel data

There has been an increasing interest among economists in the impact of management practices on firm’s productivity. This paper explores how business practices affect firm productivity by using Vietnam’s bi-annual surveys of small firms conducted from 2006 to 2011. We constructed a simple weighted business practice index from 8 indicators. This index is simple but rather suitable for small and medium firms in developing countries. To examine the role of business practices in determining firm performance, production function and determinants of business practice adoption are estimated using the GMM-system method, which allows us to control for the endogeneity of production input, business practices index, and other factors. The results indicate that business practice index has a positive and statistically significant impact on firm productivity, employment and sales growth. As business practice index increases by 1 standard deviation (e.g. by 0.194 points over 1 and 0.173 points), the firm's value added increases by 19.1% to 24.0%. There is no evidence that the education level of the business owners/managers, percentage of employees with college degree on firm productivity. The results suggest that education may have indirect effects on productivity through business practice index. The effect of business practice on firm performance is found to vary across different sub-samples.. Both direct and indirect effects of competition lose their significance when we separately estimate production functions for each group of firms. We also find that for whole sample and for sole proprietorship businesses, the adoption of business practice in last period have a positive and statistically significant effects on the adoption of business practice in this period. However, total factor productivity (estimated from production function without business practice index) in the previous period does not have a strong impact on a firm’s adoption of business practice in this period while previous revenue and value added have a statistically significant impact.