RESEARCH PROPOSAL

DETERMINANTS OF CORPORATE INVESTMENT DECISIONS THE CASE STUDY OF VIETNAM

I. Problem statement
The goal of any enterprises when operating as a business is oriented towards maximizing the value of the firm, which in turn increases the return of investment for shareholders. In order to achieve this goal, companies must implement a variety of measures, including the selection of an appropriate financial structure. This is the most important finance function amongst the modern items. It implicates decisions to commit sources of financing to total assets of the firms. Capital expenditure or investment decision has significant importance to the firm because of the following reasons: (1) it impacts not only growth of the firm in long run but also influence the firms risks; (2) it involves liability of a large amount of capital; (3) it is unalterable, or alterable at heavy financial loss; and (4) it is one of the most difficult decisions to be taken by the firm. Because of its role in the firm value, many researchers have studied this issue. For instance, Modigliani and Miller theorem (1958) documented that there has been no relation between the financial structure and financial policy for real investment decisions under certain conditions, because the financial structure would not influence the investment costs. According to the q-theory of Tobin (1969) and extended into a proposed model by Hayashi (1982), investment demand could be predicted by the ratio of the market value of the firms capital stock to its replacement cost under perfect market assumptions; and its market value could also explain further investment opportunities. Nonetheless, the results of previous studies in different countries using the q-theory of investment are mixed. In particular, Hall et al. (1998) studied the key factors which affect investment in scientific firms for the United States, France and Japan during the period 1979-1989, and found that the profit, sales, cash flow and investment have connections, but differs for each country. Aquino (2000) found contrary results that there was no significant relationship between investment rate and q. He also showed that there is an insignificant relationship between the investment rate and cash flow.

The Vietnamese government has implemented a series of policies aimed at improving the business environment for enterprises in the country. This comes in the wake of Vietnams joining of the WTO in 2007, and since then, a variety of companies have invested in multi-sectors businesses and spread-out, in order to become conglomerates. This has conversely created a trend. These businesses have been investing in several projects which do not relate directly to their strong main sectors such as real estate and stocks, while the management capacity and inexperience of enterprises, the governments institutions, and infrastructure have not developed as fast as the multi-sector and spreading investments. Instead of investing directly in foundational material such as machinery, construction and renovation of factories, research and development (R&D), and improving human resource management so as to develop their businesses, they have chased the trend of the multi-sector and spread investment so that they can obtain benefits immediately. As a consequence, the efficiency in investment of corporate businesses lowers, and may even be at the level of a loss. Because of this, it can cause stagnant equity, and influence the financial situation of the firms. This could ultimately lead to bankruptcy; as in the cases of VINASHIN1 and EVN2. Apart from this, it is not easy for enterprises to access sources of capital when real lending interest rate is so high in recent time (normally, the real lending rate is 18% - 20% per year; some cases is 23% per year). The reasons are by economic trends at the domestic, regional and global level. This can thus affect the firms investment decisions and processes of production with their business operations. In other words, investment issues affect not only the survival of the businesses, but also the levels of unemployment and economic development of a country. Although there are several papers that have studied on the determinants of investment decisions at the firm level, these however are mainly focused on developed economies and some emerging countries (e.g., the United States, the United Kingdom, Canada, India, China, and Korea). To the best of my knowledge, only a group of researchers have attempted to address this issue as it relates to the scenario in Vietnam, while investment decision of the firms as become a big issue in recent years. Concretely,
1

VINASHIN is a Vietnam Shipbuilding Industry Group. This Group involved in many projects in several different fields of economics beside its main business - shipbuilding; for instance, sea transport, ports, steels, cements, beers, air services, insurance, banking, import (cars and motorbikes) and agricultures. Because of multi-sector and spread investment, VINASHIN has been facing to financial problems in heavily (more than VND 80,000 billions or over USD 4 billions of debt) and facing lawsuits to be raised by foreign creditors (e.g., Elliott Vin, Netherlands).
2

EVN is a Vietnam Electricity Group. This group invests not only in electricity- main sector, but also spreads in hospitality, tourisms, media, real estate, etc. As a result, the group has been facing a large losses in recent years (in 2010, the loss is VND 8,400 billions or over USD 400 millions) and facing large debts (as of June.30, 2011, EVN has remained in debt to PetroVietnam about VND 8,860 billions or over USD 440 millions, and Vietnam National Coal, Mineral Industries Corporation about VND 1,200 billions or over USD 50 millions).

Ninh L.K. et al. (2007) analyzed some factors involved with the impact on investment decisions of private enterprises in the Mekong River Delta. Nonetheless, this research did not determine other variables, namely investment opportunities, region, or business risk, which might have an influence on investment decisions at the firm level. This thesis, therefore, proposes to investigate this situation as it relates to a larger scale.

II. Research Objectives

With investment situation of enterprises in Vietnam and the continuing importance of corporate investment decisions in mind, the overall goal of this thesis is to examine factors which affect investment decisions at the firm level in Vietnam. To achieve this overall goal requires meeting the following specific objectives: (1) To determine whether cash flow affects corporate investment decisions; (2) To determine whether investment opportunities exerts influence on investment decisions of the firms; (3) To test whether other financial factors impact on investment decisions at the micro level; (4) To suggest policy recommendations for the enterprises in making decisions.

III. Research questions

Specifically, the research aims to address the following questions:
(1) Does cash-flow affect the investment decisions of Vietnamese firms?

(2) Do investment opportunities influence corporate investment decisions in Vietnam? (3) Can corporate investment decisions be explained by other financial factors in Vietnam? (4) What are the strategic implications for the firms in making investment decisions?

IV. Scope and Methodology of Research 1 Data sources

The research employs data of firm-level which is listed on the stock market in Vietnam (HOSE and HNX). As of 2010, there were 644 firms listed on Vietnams stock market. However, the thesis just analyzes non-financial firms because the determinants of their investment decisions are different from 3

that of financial companies. In particular, enterprises which operate in the financial sector have different Balance Sheets from those of the non-financial firms. Besides that, the thesis excludes enterprises which have been no longer listed as BBT; or, companies where there is not enough information on Financial Statements. Therefore, the research investigates a sample of 520 of 644 listed firms during the years 2006 to 2010. The information of listed firms is mainly obtained from VNDIRECT and Cophieu68 websites; others are from companies websites. Based on Financial Statements of these listed enterprises, the study calculates the values of variables which determine investment decisions. In brief, the unbalanced panel data covers a 5-year period from 2006 to 2010 with observations on 520 listed firms, which is a total of 1,544 observations.

2 Variables
The research presents the variables used to analyze the determinants of corporate investment decisions. The set of dependent and independent variables is summarized in Table 3.1 (appendix). Furthermore, the research chooses these independent variables under literature and empirical studies on the factors affect investment decisions at the firm level.

Dependent variable
Investment rate Investment rate, which is used as dependent variable, reflects corporate investment decisions. It is the ratio of investment expenditure to capital stock; and, described by following formula: Ii,t / Ki, t-1= (Capital Expenditureending Capital Expenditurebeginning) / Ki, t-1 in which capital stock equals fixed assets. This variable is taken from Balance Sheets of firms.

a. Independent variables
Cash-flow The research uses cash-flow as a proxy for internal net worth of company. It is generated by the sum of net income after tax and depreciation and amortization. This variable is taken from Balance Sheets and Income Statements of firms. Cash-flow is an important determinant for investment decisions of firms because if firms have enough cash inflows, it can be utilized in investment activities. In other words, firms already know about potential investment opportunities; however, they cannot invest because access to external funds is limited. When cash-flow is improved, they can participate in attractive opportunities that might be otherwise unavailable. Audretsch and Elston (2002), Saquido (2003), Aivazian et al. (2005), Azzoni and Kalatzis (2006), Adelegan and Ariyo (2008), Jangili and Kumar 4

(2010), Li et al. (2010), Nair (2011), Ruiz-Porras and Lopez-Mateo (2011) also found that cash flow impacts positively on firm investment decisions. However, only Bokpin and Onumah (2009) concluded that the relationship between cash flow and investment is negative. Therefore, the expectation of this link in this thesis is positive. Tobins q Tobins q is used as a proxy for investment opportunities of enterprises. The measurement of q is the ratio of market value of total assets to book value of total assets. Based on the proposal of Li et al. (2010), the market value of total assets is employed by following formula: Market value of total assets = (Liability + stock price * number of tradable share + net asset per share * number of untradeable share) Information of this variable is taken from Balance Sheets and Annual Reports of firms, as well as the website of Cophieu68 for stock prices. It can be stated that investment opportunities are involved in the investment decisions. Higher investment opportunities would cause higher investment in a world where enterprises attempt to maximize the value of firm through net present value positive projects. In terms of empirical studies, Saquido (2003), Aivazian et al. (2005), Baum et al. (2008), Carpenter and Guariglia (2008), Bokpin and Onumah (2009), Li et al. (2010) also documented that the link between investment and q is positive. Thus, the thesis expects that investment decisions are positively influenced by investment opportunities. Leverage Measure of leverage in the research is the ratio of total liabilities to total assets. This variable is calculated from Balance Sheet of each firm. Leverage might have a negative impact on corporate investment decisions through two channels. First of all, an increase in leverage might strengthen bankruptcy risks; managers are afraid that shareholders would be move to decline borrowings and/or reduce investment. Secondly, higher levels of debt result in reducing funds in hand; therefore leverage has an inverse effect on investment decisions at the firm level. This connection is also negative in the research of Aivazian et al. (2005). On the contrary, Azzoni and Kalatzis (2006), Ninh L.K. et al. (2007), Adelegan and Ariyo (2008), Jangili and Kumar (2010), and Nair (2011) found that there is positive relationship between leverage and investment. The reason is that firms which have more investment opportunities, higher risk projects, and more debts, it might push the asset substitution by increasing more investment to cover their performance. Moreover, Li et al. (2010) concluded that the 5

relation between debt financing and investment is mixed. Thus, the relationship between investment decisions and leverage is expected as negative or positive. Fixed capital intensity The research also uses fixed capital intensity in the model of investment although it is rarely employed. However, Aquino (2000) and Saquido (2003) analyzed this variable and found that setup costs related to high fixed capital expenditures put some restraint on additional investment in the context of Philippines. Fixed capital intensity is measured by fixed assets divided by total assets that are taken from Balance Sheets of firms. It is clear that when fixed capital increases, it means the firms invest more in machinery to satisfy demand for production. Hence, this variable is expected to have positive relationship with investment. Sales growth Growth of sales is used as a proxy for firms growth that may affect investment decision. It is normally stated in terms of a percentage growth from the prior year. Sales growths values are calculated from Income Statements of firms. It can be stated that if demand for consumer goods goes up, it leads to an increase in demand for production, or sales growth. Hence, the demand for capital and machinery will increase as well. Most of previous studies, namely, Saquido (2003), Ninh L.K. et al (2007), Carpenter and Guariglia (2008) also found that the relationship between investment decisions and sales growth is positive. It means that increase in sales leads to the firm invest more and otherwise. The expectation of this connection, therefore, is positive. Business risk According to theory, investment decisions should be affected by changes in risk levels 3. The research, therefore, also employs this variable in analysis of investment decisions. It is generated by variation of revenue with following formula: Business risk = standard deviation (Revenuet Revenuet-1) / mean (Revenue) In order to calculate the value of business risk, the research takes information from Income Statements of firms. This variable is expected to be inversely related to investment because firms will be afraid of investing in the projects which has more risks. Firm size
3

Robert S.Pindyck (1986) Capital risk and models of investment behavior

From previous researches, there are three measurements of firm size such as log value of total assets, total revenue, and total employees. Some information is not complete because the Annual Reports of some firms contain the information of number of employees, while some firms have not. Additionally, since total asset is used for measuring Tobins q, leverage and fixed capital intensity, the thesis therefore employs the total revenues measurements to analyze. The information of total assets is obtained from Income Statements. One on hand, Ninh L.K. et al. (2007), Bokpin and Onumah (2009) proved that firm size as a negatively significant determinant of investment decisions. The reason is that the management capabilities or human resource cannot control all things or meet requirements in a large firm; thus, they tend to less investment. One the other hand, Adelegan and Ariyo (2008), Jangili and Kumar (2010), Li et al. (2010), Ruiz-Porras and Lopez-Mateo (2011) had opposite findings. The reason is that large firms should have better access to external capital sources, more stable cash flows and more diversified than small firms. Therefore, it leads to incentive investment activities. Thus, firm size is expected to be mix associated with investment. Ownership concentration In terms of investment decisions, state-owner enterprises might be different from other types of enterprises. Specifically, these firms are strongly influenced by the government; and even as tools for the implementation of government policies. For that reason, the government expects that state-owner firms will be more active in investment than non-state owned enterprises. Therefore, the thesis employs ownership concentration as a dummy variable to express characteristics of listed firms. Taking 1 for firms whose state stock holding equals or more than 50%; taking 0 for others.

3. Modeling specification
There are many factors affecting enterprise investment. Based on the Tobins q model, and a further modification on the research of Hu Schiantarelli (1998), Erickson & Whited (2000), Gomes (2001), Saquido (2003), Hanousek & Filer (2004), Ninh L.K. et al (2007), Carpenter and Guariglia (2008), Bokpin and Onumah (2009), Li et al. (2010), Ruiz-Porras and Lopez-Mateo (2011), and Nair (2011), this thesis proposes the following model to estimate the determinants of investment decision at the firm level. Yit = 0 +

k =1

X kit + uit

(1)

where Y is predicted variable, the firms investment rate; X includes cash-flow of firms, Tobins q, fixed capital intensity, growth of sales, firm size, business risk of firms, leverage of firms, interaction between leverage and ownership concentration4; and uit is the error term. The subscript i, t, k indicates firms, time (year) and the number of explanatory variables respectively.

4. Methods of estimation
The research employs panel data including pooled time series of cross section where one has repeated observations on firms over years. Normally, methods of estimation for panel data are Ordinary Least Square (OLS), Fixed Effects Model (FEM), and Random Effects Model (REM). Particularly, the researchers assumed the unobservable individual effect is zero and employ pooled OLS regression to estimate the investment equation. This assumption leads to problem of heterogeneity across industries and across firms within the same industry. Hence, FEM and REM are used to cope with this problem. Nonetheless, it is difficult to choose which one is the most appropriate. Therefore, using STATA11 software, the research firstly performs a Breusch-Pagan Lagrange Multiplier (1980) test to decide between OLS and REM; and a Hausman (1978) test to choose FEM or REM. In addition, the robust standard errors also perform to cope with heteroskedasticity problem if it is present. Furthermore, if having the presence of endogeneity and serial correlation problems, these can lead to biased and inconsistent parameter estimates. The best way to deal overcome these two concerns is therefore through IV-GMM (Instrument Variables - Generalized Method of Moment). The specification tests are carried out as below: 4.1 Breusch-Pagan Lagrange Multiplier (LM) test: In order to find out whether OLS or REM would be more proper, the thesis performs the LM test in which OLS is the null hypothesis or variances across firms is zero. The Chi-squared statistics (15.65) is recorded in Table 4.3; the null hypothesis is rejected at the 1 percent level of significance. This result implies that there is evidence of cohort effect is different from zero; and thus, the OLS is not suitable. 4.2 Hausman test: To decide between FEM and REM, the research run the Hausman test where the null hypothesis is that the coefficients estimated by the efficient RE estimator are the same as the ones estimated by the consistent FE estimator. Basically, it tests whether the unique errors are correlated with the regressors;
4

In this equation, the reasearch adds the interaction between leverage and ownership concentration to investigate the following

hypothesis. The state-controlled enterprises are strongly supported by the government. They are thus expected to be more active in inestment than private firms. However, because state-owned enterprises are under the strong support of the government, they are less oriented towards profit than private firms. That is the reason why they are able to make less utility of good investment opportunites and to be not incentive investment.

and, the null hypothesis is they are not. After that, based on the Chi-squared statistic (146.49) is displayed in Table 4.3, the null hypothesis is rejected at the 10 percent level of significance. This result suggests that FEM is more appropriate. Nonetheless, there are econometric issues which may affect FE estimator. First of all, there can be a high correlation between the different predictor variables that might influence the efficiency of the estimated coefficients. However, the results of Table 4.2 is basically smaller than 0.40; therefore, the problem of multi-collinear is not serious. 4.3 Robust Standard Errors correction: Secondly, if the error terms do not have constant variance, they are said to be heteroskedasticity (HET). In the presence of HET, the standard errors are biased. It thus causes bias in test statistics and confidence intervals. In order to detect any linear model of HET, a modified Wald test is designed. If HET is present, the thesis employs the Robust Standard Errors to resolve the problem. 4.4 Durbin-Wu Hausman test: To identify endogeneity problem, the Durbin-Wu Hausman test is applied. The research conducts exogeneity test on all the predictor variables used in the regression models. The null hypothesis is the considered predictor variable is exogeneity. Otherwise, the alternative hypothesis is endogenous variable at a specific significance level. 4.5 Instrumental Variables techniques: As displayed above, FEM is the most proper among these three methods of estimation. However, if the explanatory variables in the model are endogenous to investment and autocorrelation issue, FE estimator is criticized that the parameters might be biased and inconsistent. An alternative method to solve these problems is to instrument for the endogenous variables. Instruments can be from external sources or internal ones. Normally, external instruments are arduous to find and they might in turn be invalid. In fact, researchers thus employ internal instruments to prevent bias problems. Anderson and Hsiao (1982) utilized the second lag of the outcome variable as instruments. Arellano and Bond (1991) designed differences GMM estimator with employing lagged levels as instruments for the predicted and predictor variables. The GMM regression can deal with not only endogeneity and autocorrelation issues but also the panel dataset, which has a short time dimension (T=5) and a larger firm dimension (N= 520). The thesis, therefore, use the GMM estimator to analyze. In specific, GMM estimator is explained based on dynamic panel model as below: Yit = 0 + Yit s + X itk + it
s =1 k =1 s k

(2)

Where Y is outcome variable, the firms investment rate; Yit-s represents lagged predicted variable; X represents explanatory variables; i represents firm specific effects; it represents disturbance term having the properties, E(it) = 0 and Var(it) = 2. The subscript i, t, k, s indicates firms, time (year), the number of explanatory variables and the number of lags respectively. After taking first-difference equation (2) to eliminate the specific effects, GMM estimator is utilized to estimate: Yit = 0 + Yit s + X itk + it
s =1 k =1 s k

(3)

In the GMM technique, endogenous variables are found out such as fixed capital intensity, sales growth, and leverage. In addition, instruments are cash-flow, Tobins q, firm size, business risk, leverage x ownership, risk x ownership, leverage x section dummy5, and leverage x region dummy6.

V. Research structure
The research is organized in five sections, including this introduction. Section 2 reviews theories of investment and empirical studies of investment decision at the micro level. Section 3 describes data collection and methodology in which the model for estimation and method of estimation are outlined. Section 4 presents the results from analyzing data and discussion. Section 5 briefly draws the conclusion, recommendations and limitations.

Sector dummy variables include variables for Health Care, Technology, Telecommunication, Consumer Goods, Oil &

Gas, Basic Materials, Industrials, Consumer Services, and Utilities.

6

Region dummy variables include variables for Hanoi, Ho Chi Minh, Northern, North Central, Central Coast, Highlands,

Southeastern, and Mekong River Delta. The research separated different regions without following by administrative ones because most of listed firms in the Vietnamese stock market are located in Hanoi or Ho Chi Minh City.

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