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ASEAN Economic Bulletin Vol. 23, No. 2 (2006), pp. 192–211 ISSN 0217-4472 print / ISSN 1793-2831 electronic

DOI: 10.1355/ae23-2d

Capital Structure in Small and

Medium-sized Enterprises
The Case of Vietnam

Tran Dinh Khoi Nguyen and Neelakantan Ramachandran

The objective of this article is to identify the determinants influencing the capital structure of
small and medium-sized enterprises (SMEs) in Vietnam. Empirical results show that SMEs
employ mostly short-term liabilities to finance their operations. A firm’s ownership also
affects the way a SME finances its operations. The capital structure of SMEs in Vietnam is
positively related to growth, business risk, firm size, networking, and relationships with
banks; but negatively related to tangibility. Profitability seems to have no significant impact
on the capital structure of Vietnamese SMEs. The strong impact of such determinants as firm
ownership, firm size, relationships with banks, and networking reflects the asymmetric
features of the fund mobilization process in a transitional economy like that of Vietnam.

Keywords: SMEs, capital structure, leverage, networking, banking relationships.

I. Introduction development (Doanh and Pentley 1999). This

Vietnam has been changing to a market-oriented
economy over the past eighteen years, and there is
growing recognition of SMEs’ importance in the
transitional economy. Consequently, the
Government has introduced numerous policies in
order to support this important business sector.
According to recent statistics, 96 per cent of
registered firms are classified as small and
medium-sized firms, of which private SMEs
account for nearly 82 per cent. The small business
sector in Vietnam also generates 25 per cent of
annual GDP. However, SMEs still face the
difficult issue of access to capital for future
raises a question as to what factors influence the
capital structure of Vietnamese SMEs — an
important concern in improving financial policies
to support the small business sector.
There are only a limited number of studies on
factors influencing capital structure among
Vietnamese firms. Some of these studies just
focused on an industry (San 2002) or listed firms
on the Ho Chi Minh City stock market (Vu 2003).
The financial sector in Vietnam is characterized
by a bank-based system, where state-owned
commercial banks (SOCBs) play an important
role, with limited sources of long-term finance

ASEAN Economic Bulletin 192 Vo l . 2 3 , N o . 2 , A u g u s t 2 0 0 6

© 2006 ISEAS

04 Tran Dinh Khoi 192 8/1/06, 2:21 PM

 (ADB 2002). In a study of the banking sector in
Vietnam, Soo (1999) reported that SOCBs provide
78 per cent of total loans in the economy, and half
of SOCBs’ credits are channelled into state-owned
enterprises (SOEs). Thus, a fragile banking sector
makes it more difficult for SMEs, especially
private ones, to access bank loans.
As for similar studies in other countries, most
empirical evidence on capital structure tends to
focus on large firms in developed countries
(Marsh 1982; Titman and Wessels 1988; Bennet
and Donnelly 1993; Bevan and Danbolt 2000).
Only in recent years have a few studies examined
these issues either in developing countries or
among small firms (Hamilton and Fox 1998;
Booth et al. 2001; Michaelas, Chittenden, and
Pitziouris 1999; Graham, Hutchison, and
Michaelas 2000; Mira 2001; Bhaduri 2002). A
review of empirical studies on the capital structure
of SMEs helped us to identify some key issues.
Not all determinants are consistent with those
predictions advanced by theories of finance.
Indeed, there are some contrary results on the
relationship between some determinants and
capital structure among firms in some countries
(Michaelas 1999; Mira 2001, Heshmati 2001). In
addition, the firm characteristics are often at the
centre in most empirical studies, while the effects
of managers’ behaviour have seldom been
examined. In a qualitative piece of research,
Michaelas, Chittenden, and Pitziouris (1998)
argued that owners’ behaviour, in conjunction with
internal and external factors, will determine
capital structure decisions. This requires further
quantitative studies to examine what factors
influence capital structure in the small business
sector in developing countries.
Based on such gaps in the existing literature,
this paper attempts to study features of the capital
structure of Vietnamese SMEs, over the period
1998–2001, and examine the influence of specific
determinants on SMEs’ capital structure. This
study has combined data from financial statements
and questionnaires given to SMEs’ financial
managers to explore how Vietnamese SMEs
finance their operations. The study examines such
determinants as growth, tangibility, business risk,
ASEAN Economic Bulletin
04 Tran Dinh Khoi 193
profitability, size, ownership, relationship with
banks, and networking on three measures of
capital structure.
The remaining sections of this paper are
organized as follows: Section II presents an
overview of the literature on capital structure and
develops testable hypotheses. Section III describes
the methodology and measurement of variables.
Section IV reports and discusses the results.
Section V summarizes the findings of this study.
II. Literature Review and Hypotheses
Capital structure is defined as the relative amount
of debt and equity used to finance a firm. Theories
explaining capital structure and the variation of
debt ratios across firms range from the irrelevance
of capital structure, proposed by Modigliani and
Miller (1958), to a host of relevance theories. If
leverage can increase a firm’s value in the MM tax
model (Modigliani and Miller 1963; Miller 1977),
firms have to trade off between the costs of
financial distress, agency costs (Jensen and
Meckling 1976) and tax benefits, so as to have an
optimal capital structure. However, asymmetric
information and the pecking order theory (Myers
and Majluf 1984; Myers 1984) state that there is
no well defined target debt ratio. The latter model
suggests that there tends to be a hierarchy in firms’
preferences for financing: first using internally
available funds, followed by debt, and finally
external equity.
These theories identify a large number of
attributes influencing a firm’s capital structure.
Although the theories have not considered firm
size, this section will attempt to apply the theories
of capital structure in the small business sector,
and develop testable hypotheses that examine the
determinants of capital structure in Vietnamese
SMEs.
II.1 Firm Growth
Pecking order theory suggests that a firm’s growth
is negatively related to its capital structure.
According to Myers and Majluf (1984),
information asymmetry demands an extra
193 Vo l . 2 3 , N o . 2 , A u g u s t 2 0 0 6
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 premium for firms to raise external funds,
irrespective of the true quality of their investment
project. In the case of issuing debt, the extra
premium is reflected in the higher required yield.
High-growth firms may find it too costly to rely
on debt to finance growth.
The agency problem also suggests a negative
relationship between capital structure and a firm’s
growth. Myer (1977) argued that high-growth
firms might have more options for future
investment than low-growth firms. Thus, highly
leveraged firms are more likely to pass up
profitable investment opportunities, because such
an investment will effectively transfer wealth from
the firm’s owners to its debt holders. As a result,
firms with high growth opportunities may not
issue debt in the first place, and leverage is
expected to be negatively related to growth
opportunities.
However, Myers (1977) argued that the agency
problem could be mitigated if long-term debt is
replaced by short-term debt. This suggests that the
short-term debt ratio might actually be positively
related to growth rate, if growing firms substitute
short-term financing for long-term financing. We
think that this proposition is more relevant in the
context of the small business sector in Vietnam,
where there was a scarcity of long-term credits in
the period 1998–2001 (ADB 2002). In addition, as
most SMEs in Vietnam operate in the trading and
service sectors, demand for new investment in
fixed assets are relatively low. Doanh and Pentley
(1999) also argued that Vietnamese SMEs often
look for short-term bank loans or other resources
from relatives, friends or suppliers to finance their
operations. Taking percentage change in total
assets as a measure of firm’s growth, we
hypothesize that:
H1: A firm’s growth will be positively
related to debt ratios
II.2 Tangibility
Both theory of financial distress and agency
theory propound that tangibility has a positive
relation to capital structure. According to the
theory of financial distress, if a firm has a high
ASEAN Economic Bulletin
04 Tran Dinh Khoi 194
proportion of tangible assets, it will use more debt
than a firm with high proportion of intangible
assets, because the former has lower costs of
financial distress in the case of bankruptcy.
Conversely, intangible assets are more likely to
lose value if financial distress occurs.
The agency problem also explains this
relationship. Jensen and Meckling (1976) point out
that agency cost of debts exist, as a firm may shift
to riskier investment after the issuance of debt, and
transfer the wealth from creditors to shareholders to
exploit the option nature of equity. If a firm’s
tangible assets are high, then these assets can be
used as collateral, reducing the lender’s risk of
suffering such agency costs of debt.
In a developing country like Vietnam, the
agency problem and asymmetric information
become more pronounced, so collateral
requirements become mandatory for any firm
seeking loans. If a firm possesses fixed assets with
a high collateral value, it will find it easier to get
access to bank loans. Taking the fixed asset ratio
as a measure of tangibility, we hypothesize that:
H2: Tangibility will be positively
related to debt ratios
II.3 Business Risk
According to the theory of financial distress,
higher business risk increases the probability of
financial distress, so firms have to trade off
between tax benefits and bankruptcy costs. Thus,
it predicts a negative relationship between
business risk and leverage. In the context of the
small business sector, Queen and Roll (1987)
argue that SMEs are likely to have a higher level
of business risk, relative to large firms. Therefore,
we propose the hypothesis:
H3: Business risk will be negatively
related to debt ratios
II.4 Profitability
There is no consistent relationship between
profitability and capital structure in the
considerable theoretical work undertaken, ever
since the publication of the theory of irrelevance
194 Vo l . 2 3 , N o . 2 , A u g u s t 2 0 0 6
8/1/06, 2:21 PM
 (Modigliani and Miller 1958). The pecking order
theory suggests that firms will use retained
earnings first as investment funds, and
subsequently move to debt and new equity only if
necessary (Myers 1984). In this case, there would
be a negative relationship between profitability
and leverage. Although the tax model suggests a
contrary prediction, in which profitable firms
should borrow more to take tax advantages, we
disagree with this argument because SMEs in
Vietnam have difficulty in gaining access to credit.
In addition, SMEs’ managers are usually the
owners, so they do not like to lose their property
and control over their firms, and prefer to use
retained earnings to finance their operations. Thus,
our next hypothesis is:
H4: Profitability will be negatively
related to debt ratios
II.5 Firm Size
Many studies suggest that there is a positive
relationship between leverage and size. Marsh
(1982) finds that large firms more often choose
long-term debt, while small firms choose short-
term debt. Large firms may be able to take
advantage of economies of scale in issuing long-
term debt, and may even have bargaining power
over creditors. So the cost of issuing debt and
equity is negatively related to firm size. In
addition, larger firms are often diversified and
have more stable cash flows, and so the
probability of bankruptcy for larger firms is less,
relative to smaller firms. This suggests that size
could be positively related with leverage.
The positive relationship between size and
leverage is also viewed as support of asymmetric
information (Myers and Majluf 1984). Small size
is likely to lead to severe information asymmetries
between SME owners and potential lenders in
Vietnam, where SMEs are unlikely to have
adequate and reliable financial statements (Doanh
and Pentley 1999). This situation means SMEs
face more difficulties in accessing loans from
financial institutions. As predicted by many
theories, we hypothesize that:
H5: Size will be positively related to debt ratios
ASEAN Economic Bulletin
04 Tran Dinh Khoi 195
II.6 Firm Ownership
The role of state ownership is still a controversial
topic in Vietnam’s reform process. As noted
above, the Vietnamese financial system is
characterized by a bank-based system where
SOCBs1 dominate and provide the bulk of loans in
the economy (ADB 2002). Soo (1999) also
pointed out that most SOCB credits are channelled
to SOEs. It can be validly argued that state-owned
SMEs have their own advantages over private
SMEs in accessing credit from SOCBs. The
plausible explanation for this argument is that
state-owned SMEs have long-lasting ties with
commercial banks from the pre-reform era.
Because they are state-owned, SOCBs’ policies
favour the state business sector, as compared to
the private business sector, notably in terms of
interest rates, banking procedures, and collateral
requirements. Therefore, it could be expected that
state-owned SMEs have more opportunities to
access bank loans. Based on this argument, we
hypothesize that:
H6: State-owned SMEs will employ
more debt than private SMEs.
II.7 Relationships with Banks
Banking practices with respect to procedures and
regulations can affect a firm’s ability to access
loans. A close relationship with banks can reduce
the asymmetric information and relax the liquidity
constraints for borrowers (Petersen and Rajan
1994). Donnelly, Berry, and Thompson (1985)
argued that there are a number of benefits for a
firm in establishing and maintaining relationships
with a few financial institutions: greater assurance
of fund availability, favourable rates and terms
when needed; and the banks’ better knowledge
of client needs. It could be expected that
relationships with banks may provide an implicit
or explicit guarantee of access to funds in order to
cover unexpected financial requirements.
The relationship between two organizations is
often described as consisting of resultant benefits
regarding information, communication, commit-
ment, and legitimation (Pfeffer and Salancik
1978). Relationships with banks generally include
195 Vo l . 2 3 , N o . 2 , A u g u s t 2 0 0 6
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 two components: business relations and social
relations. Besides business relations, social
relations are fundamental issues in doing business.
As a cultural element, social relations create a
strong degree of interpersonal trust. The
importance of social relations is recognized not
only in China, but also in Japan, Korea, and
Southeast Asia, including Vietnam (Yeung and
Tung 1996). Based on the above, one would
expect that the relationship with banks would be
even more important in Vietnam, where there is a
lack of non-bank financial resources and only
weak competition in the banking sector (Soo
1999). Thus, our next hypothesis is:
H7: The closer the level of relationships
with banks, the more debt SMEs employ.
II.8 Networking
As discussed earlier, bank regulations tend to
discriminate against private SMEs in Vietnam.
Petersen and Rajan (1994) argued that close
relationships with lending institutions help SMEs
overcome discrimination. However, Vietnamese
SMEs have different levels of relationships with
banks. Therefore, SMEs tend to look for other
sources of funds, from suppliers, relatives and
friends, to finance their operations. Greif (1993)
argued that in developing and transition countries,
where laws of contract are often inadequate,
informal relationships like networking can
substitute for the courts in allowing deals to be
made. Networking might provide information
about reliability. McMillan and Woodruff (1999)
argued that in a network, a firm might learn about
the reliability of a counterpart, not only through
directly dealing with it, but also by asking other
counterparts or family members before trading
relationship begin. Involvement in a network can
also provide a positive signal to the business
community (Holmlund and Tornroos 1997). It is
expected that a manager’s behaviour towards
networking is an important factor in obtaining
trade credits or other short-term liabilities to help
finance a firm’s operations. Therefore, the final
hypothesis is:
ASEAN Economic Bulletin
04 Tran Dinh Khoi 196
H8: The stronger the level of networking, the
greater the level of liabilities held by SMEs.
III. Methodology and Measurement
of Variables
III.1 Data Collection
This study covers only those SMEs registered
under the Law of Enterprises in Vietnam. The
study does not include household firms,
individual business people, or unregistered small
firms. SMEs in this study are defined as firms
with less than 300 employees and/or a registered
capital of less than 10 billion Vietnam dong
(VND), as is legally defined by the Government
in Vietnam. Financial firms (such as banks,
insurance companies, and credits unions) and
foreign-owned SMEs or joint-ventures are also
excluded from this study because these firms
tend to have their own characteristics, due to
ownership ties with “mother companies”, or their
specific financial behaviour and nature of
business (Rajan and Zingales 1995; Wald 1999;
Bevan and Danbolt 2000).
The sampling frame is another important
procedure during the data collection process.
Experienced researchers have found that only
rarely is there a perfect correspondence between
the sampling frame and the target population in
which they are interested (Churchill 1992).
Therefore, the sampling frame may not correspond
perfectly to the population, but it does represent
the target population. Ho Chi Minh City and
Hanoi represent the largest economic centres in
the south and north of Vietnam, respectively. As a
result, a list of SMEs from these cities, available
from the Company Registration Department of the
Ministry of Planning and Investment, represent the
target population. Stratified random sampling
drew a sample of 558 SMEs, of which 176 are
state-owned and 382 are private.
Based on the chosen sample, we conducted
direct interviews with the SMEs’ financial
managers, in order to explore their opinion about
debt financing. Financial managers were chosen
because they have knowledge of company finance,
196 Vo l . 2 3 , N o . 2 , A u g u s t 2 0 0 6
8/1/06, 2:21 PM
 and they either consult the firm’s owners and/or
have the right to make financial decisions. After
the interviews were finished, we continued to
gather the SMEs’ financial statements, over
the period 1998–2001, from the Provincial
Department of Planning and Investment.2 The
period selected for this study is significant because
the Eighth Congress of Vietnam’s Communist
Party, held in 1996, formally recognized the
importance of SMEs in the Vietnamese economy.
In addition, during this period economic policies
supporting SMEs’ operations were also initiated.
III.2 Measuring Variables
The study uses three different measures of capital
structure, based on book value. Market value is
not considered because Vietnamese SMEs are not
listed on the stock market. More specifically, the
three dependent variables were:
• Debt ratio = Total debt to total assets
• Short-term liabilities ratio = Short-term
liabilities to total assets
• Other short-term liabilities ratio = Other short-
term liabilities to total assets (mostly financing
from networks)
Short-term liabilities are defined as the portion
of a firm’s total debt repayable within one year.
They include short-term bank loans and other
short-term liabilities, such as trade credits, tax
payables and other account payables. Long-term
debt ratio is not used because the pilot survey
showed that most SMEs in Vietnam do not
mobilize long-term debt to finance their
operations.
The debt ratio is used as the main measure of
capital structure, and the others are employed to
check for robustness. This is because when a firm
wants to obtain more debt, the lenders will
typically consider not only how many bank loans
the firm has, but also how many other short-term
liabilities exist. Moreover, Vietnamese SMEs
often use trade credits or other funds from
networks as a means of financing, so other short-
term liabilities should also be included in
measures of leverage.
ASEAN Economic Bulletin
04 Tran Dinh Khoi 197
As far as independent variables are concerned,
we have selected several proxies that appear in the
empirical literature.
• Growth = Percentage change in total assets
(Titman and Wessels 1988; Chittenden, Hall,
and Hutchinson 1996).
• Tangibility = Ratio of fixed assets to total assets
(Chittenden, Hall, and Hutchinson 1996;
Michaelas, Chittenden, and Poutziouris 1999;
Huang and Song 2001).
• Business risk = Standard deviation of profit
before tax (Heshmati 2001; Huang and Song
2001; Pandey 2001).
• Profitability = Natural logarithm of ratio of
profit (before tax) to revenues (Titman and
Wessels 1988).
• Size = Natural logarithm of the number of
employees (Heshmati 2001).
The measures for firm size and profitability are
transformed in natural logarithm to achieve the
normal distribution and linearity. Instead of using
profit before tax and interest, profit before tax was
utilized to calculate profitability because interest
expenses are not presented separately in
Vietnamese income statements, up until 2002.
Thus, the measure of profitability in this research
may differ from findings of similar studies of
capital structure.
With regard to firm ownership, we divided
SMEs into two groups: the first group for state-
owned SMEs, and the other for private SMEs,
consisting of joint stock companies, limited
liability companies, sole proprietor and other
firms. As a dummy variable, we denote a value of
0 for private SMEs, and a value of 1 for state-
owned SMEs.
Various data related to SME behaviour were
sought through questionnaires. This was the case
for such determinants as relationships with banks
and networking. The level of relationship with
banks is measured by a 5-point Likert scale
(Anderson, Basilevsky, and Hum 1983), from very
little (1) to very extensive (5). The level of
networking is also measured by a 5-point Likert
scale, from very weak (1) to very strong (5). To
assess the reliability of these measures in this
197 Vo l . 2 3 , N o . 2 , A u g u s t 2 0 0 6
8/1/06, 2:21 PM
 research, Cronbach’s Alpha (Hair 1995) was
employed. The result showed that Cronbach’s
Alpha for “relationship with banks” and
“networking” is 0.732 and 0.573, respectively.
Thus, there was an internal consistency in the final
set of responses regarding these two determinants.
III.3 Methods of Analysis
This study utilized multiple regression analysis to
test the hypotheses formulated above. With
financial data collected over the period 1998–
2001, we calculated four-year mean values of
dependent and independent variables, except for
the cases of firm growth and profitability. For
determinants related to managers’ behaviour, we
also employed factor analysis, through the
Principal Component technique, to determine a
minimum number of unobservable common
factors, as Hair (1995) has suggested. The
minimum number of factors is extracted by using
the commonly used Kaiser rule of thumb (i.e., the
initial Eigen value should be greater than or equal
to one). Next, the factor scores are estimated and
utilized for further multivariate analysis. Since the
factor scores are generated through an orthogonal
transformation, they do not pose any multi-
collinearity problems for the regression equation.
The analysis process follows three stages. In
the first stage, we conduct regressions of all
determinants related to a firm’s characteristics
(growth, tangibility, business risk, profitability,
and size) on various measures of capital structure.
In the second stage, we add a dummy variable to
consider the effect of firm ownership on capital
structure. In the last stage, we examine the
influence of all determinants on capital structure,
including the effect of relationships with banks
and networking.
IV. Results and Discussion
IV.1 Descriptive Statistics
Table 1 reports the descriptive statistics of
dependent and explanatory variables. Over the
period 1998–2001, SMEs in Vietnam had an
ASEAN Economic Bulletin
04 Tran Dinh Khoi 198
average debt ratio about 43.91 per cent. However,
the debt ratio variation across the sample was
large, ranging from a maximum debt ratio of 97.25
per cent and a minimum of 4.95 per cent. With
respect to debt maturity, we find that most SMEs
employ more short-term liabilities than long-term
debt to finance their operations. The average
short-term liabilities ratio was approximately
41.98 per cent, and the long-term debt ratio was
just 1.93 per cent.
Short-term liabilities employed by SMEs are
highly varied, such as commercial bank loans,
trade credits from suppliers, advance payments
from clients, borrowing from friends or relatives,
and some other sources. The other short-term
liabilities ratio, representing mostly financing
from networks, account for a relatively high
proportion (24.62 per cent) of total assets. Clearly,
financial sources from networks play a relatively
important role in SMEs’ capital structure.
To see the variation of capital structure in
SMEs, it is necessary to consider leverage by firm
ownership. State-owned SMEs have more debt
than private SMEs, with debt ratios of 63.3 per
cent and 34.9 per cent, respectively. Among
private SMEs, joint-stock companies employ more
debt than limited or proprietary firms, the debt
ratios being 43.02 per cent, 35.64 per cent and
26.72 per cent, respectively. The differences in
capital structure are also found in other measures
of leverage. The results of t-test analysis show that
there are significant differences in all measures of
leverage between state-owned and private SMEs
at 0.01 level. This result supports the notion of
ownership structure as a determinant of a firm’s
capital structure.
With regard to the exploratory variables, SMEs
employed approximately 48 employees on
average, ranging from an eight-employee
minimum value to a maximum of 285. Fixed
assets represent about 19.73 per cent of total
assets, on average. Over the 1998–2001 period,
SMEs expanded their operations with an average
growth in total assets of 19.8 per cent. As far as
profitability is concerned, the profit on sales ratio
is only 2.97 per cent. When profits are a source of
198 Vo l . 2 3 , N o . 2 , A u g u s t 2 0 0 6
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04 Tran Dinh Khoi
TABLE 1
Capital Structure and Explanatory Variables, by Ownership Structure

199
Overall Mean (stan. Dev.) in private SMEs Mean
Mean Limited Proprietary Joint Overall (stan. dev.) F value Sig.

ASEAN Economic Bulletin

(stan. dev.) liability firms stock in state-
for SMEs firms firms owned SMEs
Debt ratio 0.4391 0.3564 0.2672 0.4302 0.3496 0.6303 401.3975 0.000
(0.2037) (0.1424) (0.1168) (0.1465) (0.1492) (0.1725)
Short-term 0.4198 0.3493 0.2634 0.4022 0.3383 0.5940 349.3078 0.000
liabilities ratio (0.1935) (0.1424) (0.1182) (0.1416) (0.1453) (0.1689)
Other short-term 0.2642 0.2279 0.2112 0.2743 0.2343 0.2710 15.0037 0.001
liabilities ratio (0.1088) (0.1206) (0.1025) (0.1035) (0.1142) (0.0924)
Growth 1.1980 1.2080 1.1918 1.1980 1.1999 1.1939 0.153 0.696

199
(0.1673) (0.1556) (0.1493) (0.1571) (0.1540) (0.1935)
Tangibility 0.1973 0.1918 0.1508 0.2361 0.1947 0.2030 0.522 0.470
(0.1264) (0.1226) (0.0937) (0.1206) (0.1186) (0.1421)
Business risk 67,743 66,790 37,754 78,034 61,574 81,134 1.174 0.297
(Stan. dev. of (198,165) (275,326) (64,961) (126,534) (203,760) (185,422)
operating profits)
Profitability 2.97E-02 2.89E-02 3.04E-02 3.47E-02 3.08E-02 2.76E-02 9.638 0.002
(0.0228) (0.0347) (0.0183) (0.0313) (0.0227) (0.0227)

8/1/06, 2:21 PM
Size (Number 48 30 22 58 35 76 121.938 0.000
of employees) (46) (25) (16) (45) (32) (55)
Total asset 6,880 4,739 3,619 7,133 4,751 10,902 23.739 0.000
(millions in VND) (8,677) (3,585) (2,700) (7,237) (243) (6,880)
Note: The number of state and private SMEs is 176 and 382 firms, respectively.

Vo l . 2 3 , N o . 2 , A u g u s t 2 0 0 6
 refinancing firms’ operations, it is expected that
low profitability will affect the level of debt
employed by SMEs. The results of t-test analysis
show that there are significant differences in terms
of firm size and profitability between state-owned
and private SMEs.
The determinants of capital structure not only
depend on a firm’s characteristics, but also relate
to management behaviour towards external
finance. Table 2 indicates the mean level of nine
elements that contribute to key relationship with
banks. The results show that SME managers
strongly consider building up a relationship with
banks, through such activities as providing data
when requested, sending financial reports to banks
on a regular basis, and maintaining long-standing
business transactions with the bank. However,
they pay less attention to considering the hobbies
of bank managers, or exploiting friend or family
relations. We found that managers in state-owned
SMEs have set up relationships with banks more
actively than their peers in private SMEs.
In an attempt to analyse this issue further, the
study employed factor analysis through Principal
Component analysis. Two common factors are
extracted, and together they account for 50.3 per
cent of the variability in the original items. Factor
loading of the indicators, after Varimax rotation,
are presented in Table 3. The most important
factor to emerge is the one we have labelled as
“Business relationship with banks”. Accounting
for 30.5 per cent of variation in the original items,
it contains variables such as providing data to
banks on request, sending reports on regular basis,
a long duration of relationship with banks,
reviewing banks’ procedures in getting credit, and
reviewing services of banks on a regular basis.
Each of these components contributes towards a
stable relationship with banks.
The second factor, labelled as “Social
relationship with banks”, contains four variables:
considering the hobbies of bank managers,
inviting banks to visit the firm, reviewing the
relationship with banks, and bank managers as
friends or relatives. These social relations
generally appear to be perceived as distinct from
other business relations. While business
relationship with banks is expected as a means for
SMEs to convey its reliability to bankers, the
social relationship with the bank is also used to

TABLE 2
Mean Level of Relationship with Banks, by Ownership Structure

Mean T-test
Overall State- Private t Sig.
mean owned SMEs
SMEs
Consider hobbies of bank’s managers 2.34 2.79 2.12 –6.529 .000
Invite bank to visit firm 3.55 3.99 3.34 –7.574 .000
Bank’s managers are friends or relatives 3.03 3.12 2.99 –1.359 .175
Send reports to bank on regular basis 3.78 4.49 3.43 –14.136 .000
Provide data to banks when requested 4.00 4.51 3.75 –10.385 .000
Duration of relationship with banks 3.73 4.43 3.39 –14.041 .000
Review relationship with bank on a
regular basis 3.27 3.91 2.95 –11.989 .000
Review services of bank on regular basis 3.40 3.75 3.24 –6.316 .000
Review bank’s procedures in getting credits 3.33 4.23 2.90 –15.449 .000
Notes: Five point horizontal scale, with 1 = very weak, and 5 = very strong.
Number of observations = 558.

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 TABLE 3
Factor Analysis for Relationship with Banks

Factor
Communality
1 2
Send reports to banks on regular basis .880 8.618E-03 .775
Provide data to banks when requested .823 –.147 .699
Duration of relationship with banks .648 .351 .543
Review bank’s procedures in getting credits .612 .510 .636
Review services of bank on regular basis .478 .359 .357
Consider hobbies of bank’s managers 8.190E-02 .675 .462
Review relationship with bank on regular basis .432 .549 .488
Invite bank to visit firm .235 .532 .339
Bank managers are friends or relatives –.172 .444 .226
Variance 30.583 19.696
Cumulative variance 30.583 50.279

establish close ties with partners in Vietnam,
where the importance of social relations is still
apparent. Among these items, “considering the
hobbies of bank managers” seems to be an implicit
and broad item, reflecting such actions as inviting
bank managers to lunch or dinner, providing a
scholarship to their children, or giving valuable
gifts. These reflect some of the features of doing
business in a developing and transitional economy
like Vietnam.
With regard to networking, SME managers pay
special attention to building up networks, notably
in terms of long-term relations with suppliers,
paying suppliers on time, and being regular
clients, as shown in Table 4. In contrast, such
actions as visiting suppliers or friends, or offering
personal greetings to suppliers, are deemed less
important. It appears that, in Vietnam at least,
private suppliers look for effectiveness and
efficiency in their operations, and tend not to
extend credit to clients purely based on social
relations.
Factor analysis reveals two factors that
represent 56 per cent of the variability in the
original items under networking. The most
important factor, labelled “business networks”,
comprises three items: being regular clients, a
long and durable relationship with suppliers, and
paying suppliers on time. The second factor is a
combination of such elements as “visiting
suppliers on a regular basis”, “offering personal
greetings to suppliers”, and “suppliers are
managed by family members or friends”. We
labelled this factor as “social networks”. See
Table 5.
It is noted that business networks are different
from business relations with banks, although both
factors aim to create trust in credit providers or
overcome asymmetric information issues. The
main difference is the way in which information is
exchanged. In the case of bank relations, financial
statements or other relevant data provided by the
SME are the principal means for commercial
banks to evaluate a firm’s creditworthiness.
However, suppliers or credit providers in networks
are less familiar with interpreting financial
statements, so they rely mostly on a history of
payment. The causality of these two factors will be
discussed later.
To examine the possible degree of collinearity
among variables, we obtained the correlation
matrix of dependent and independent variables, as
shown in Table 6. It is noted that the new factors
extracted from factor analysis are employed in this

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 TABLE 4
Mean Level of Networking, by Ownership Structure

Items Overall Mean by ownership T-test

mean
Private State- t Sig. (2-
SMEs owned tailed)
SMEs
Long duration of relationship with
suppliers 3.44 3.52 3.26 2.853 .005
Visit suppliers/friends/relatives on
regular basis 2.03 2.13 1.81 3.817 .000
Offer personal greetings to suppliers 1.95 2.03 1.78 3.259 .001
Suppliers are managed by family
members or friends 2.53 2.63 2.31 3.274 .001
Pay to suppliers in time 3.66 3.67 3.64 .374 .709
Be regular clients 3.49 3.51 3.47 .399 .690
Availability to SMEs of alternative
suppliers 2.92 2.84 3.09 –2.297 .022
Notes: Five point horizontal scale, with 1 = very weak, and 5 = very strong.
Number of observations = 558.

TABLE 5
Factor Analysis for Networking Elements

Factor loading Communality

1 2
Be regular clients .885 6.073E-02 .787
Long duration of relationship with
suppliers .832 .221 .741
Pay to suppliers in time .712 5.185E-02 .509
Visit suppliers/friends/relatives on
regular basis 3.806E-02 .765 .587
Offer personal greetings to suppliers 9.781E-02 .668 .456
Suppliers are managed by family
members or friends 9.986E-02 .520 .280
Variance 33.38 33.38
Cumulative variance 22.62 56.00

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04 Tran Dinh Khoi
TABLE 6

203
The Correlation Matrix

DR SLR OSLR GW TAN BR PROF SZ BRB SRB BN SN

ASEAN Economic Bulletin

DR 1
SLR .966** 1
OSLR .663** .699** 1
GW .073 .061 .089* 1
TAN .085* –.019 –.403 –.096* 1
BR .185* .142** .126* –.024 .104* 1
PROF –.133** –.149** –.035 –.032 .000 .117** 1
SZ .578** .500** .241* .029 .183* .279** –.025 1

203
BRB .656** .641** .459** –.005 .107* .057 –.088* .362** 1
SRB .371** .310** –.078 .024 .154** .116* –.016 .317* .000 1
BN .200** .209** .353** .014 .027 .099* .036 .046 .142** –.007 1
SN –.114** –.105* .079 .007 –.018 –.010 –.057 –.192** –.120** –.029 .000 1
Notes: *: correlation is significant at the 0.05 level (2-tailed); **: correlation is significant at 0.01 level (2-tailed).
DR: debt ratio PROF: profitability
SLR: short-term liabilities ratio SZ: firm’s size
OSLR: other short-term liabilities ratio BRB: business relationship with banks

8/1/06, 2:21 PM
GW: growth SRB: social relationship with banks
TAN: tangibility BN: business networks
BR: business risk SN: social networks

Vo l . 2 3 , N o . 2 , A u g u s t 2 0 0 6
 matrix. The results indicated three issues. First,
different measures of leverage are highly
correlated with each other. The correlation is 0.966
between the debt ratio and short-term liabilities
ratio, 0.663 between the debt ratio and other short-
term liabilities ratio, and 0.699 between the
short-term liabilities ratio and other short-term
liabilities ratio. All the above correlation
coefficients are significantly different from zero at
0.01 level. The reason for this is that most debt
held by SMEs are short-term liabilities.
Secondly, we find that the correlation
coefficients are not sufficiently large to cause
collinearity problems among explanatory
variables. Thus, we can do multiple regression
analysis to build up the model of capital structure.
Thirdly, with respect to the correlation between
dependent variables and other explanatory
variables, we find that the debt ratio and short-
term liabilities ratio are significantly correlated
with most of the variables, except firm growth. We
will examine and discuss the association between
capital structure and each determinant by testing
each hypothesis. With respect to the other short-
term liabilities ratio, we find that it is significantly
correlated with such variables as business
relationship with banks, business networks, and
firm size. Thus, this kind of association will
display features of determinants related to
managerial behaviour towards the non-debt
portion of liabilities in Vietnamese SMEs.
IV.2 Empirical Analysis and Result Discussion
Table 7 presents the results of multiple regression
analysis, when we consider the consecutive effects
of all proposed determinants. We found that the
models of debt ratio are statistically significant at
the 1 per cent level. This means that the debt ratio
has a linear relationship with all variables. In the
third stage, as shown in Table 7 (Panel C), all
independent variables can explain a 71.3 per cent
change in debt ratio. If we remove the
determinants related to management behaviour
and the dummy variable, the remaining
independent variables have a lower power of
explanation. Specifically, the adjusted R2 for the
ASEAN Economic Bulletin
04 Tran Dinh Khoi 204
first and second stage is only 31.6 per cent (Panel
A) and 53.3 per cent (Panel B), respectively. Thus,
firm ownership and the management behaviour
explain more meaningfully the way SMEs finance
their operations.
Similarly, with regard to the effect of
determinants on the short-term liabilities ratio and
other short-term liabilities ratio, we found that all
models are statistically significant at the 1 per cent
level. However, the powers of explanation for
changes in the short-term liabilities ratio and the
other short-term liabilities ratio are lower, relative
to those for changes in debt ratio.
To examine the association between each
determinant and capital structure, we discuss the
results of multiple regression analysis. We found a
positive relation between firm growth and all
measures of capital structure, throughout the three
analysis stages. However, only the regression
coefficient of firm growth on the debt ratio is
statistically significant at the 10 per cent level,
when we put all determinants into the model. This
result suggests that Vietnamese SMEs rely more
on debt to finance their growth.
Our findings are similar to other studies
pertaining to the determinants of SMEs’ leverage
in the United Kingdom (Michealas, Chittenden,
and Poutziouris 1999), Spain (Mira 2001) and in
India (Bhaduri 2002). The plausible explanation
for this association is that most Vietnamese SMEs
operate in the trade and service sectors, where
demands for working capital are relatively high.
To meet the increasing requirement of working
capital for growth, SMEs normally look for bank
loans, trade credits from suppliers, friends or other
resources. In addition, SMEs involving in
networks often understand their clients, so any
asymmetric information between lenders and
borrowers is removed.
Although we find a significant positive relation
between firm growth and the debt ratio, the
growth factor has a relatively small degree of
impact on capital structure, relative to other
significant factors in the model. Its standardized
coefficient is only 0.045 in the final model for
debt ratio. It can be seen that a firm’s growth is
not an important factor among determinants
204 Vo l . 2 3 , N o . 2 , A u g u s t 2 0 0 6
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 TABLE 7
Summary of Multiple Regression Results

Debt ratio Short-term liabilities ratio Other short-term liabilities

ratio
Stand. t-stat Sig. Stand. t-stat Sig. Stand. t-stat Sig.
Coeff. Coeff. Coeff.
Panel A
(Constant) –.094 –1.601 .110 –.011 .193 .847 .095 2.521 .012
Growth .047 1.390 .165 .028 .782 .434 .071 1.745 .082
Tangibility –.078 –2.174 .030 –.166 –4.413 .000 –.115 –2.692 .007
Business risk .123 3.548 .000 .099 2.704 .007 .110 2.655 .008
Profitability –.113 –3.298 .001 –.123 –3.394 .001 –.056 –1.364 .173
Size .585 16.400 .000 .536 14.302 .000 .257 6.007 .000
Adj. R-square .361 .293 .081
F – stat 63.848 47.171 10.843
Sig. .000 .000 .000
Panel B
(Constant) –.004 –.085 .932 .096 1.875 .061 .099 2.628 .009
Growth .069 2.355 .019 .049 1.580 .115 .073 1.795 .073
Tangibility –.026 –.832 .406 –.114 –3.456 .001 –.110 –2.553 .011
Business risk .128 4.297 .000 .103 3.244 .001 .111 2.665 .008
Profitability –.076 –2.592 .010 –.086 –2.718 .007 –.053 –1.269 .205
Size .340 9.738 .010 .292 7.807 .000 .232 4.741 .000
Ownership .477 14.289 .000 .476 13.335 .000 .048 1.018 .309
Adj. R-square .533 .465 .081
F – stat 106.89 81.539 9.210
Sig. .000 .000 .000
Panel C
(Constant) .172 4.110 .000 .264 6.016 .000 .142 4.409 .000
Growth .045 1.891 .059 .026 .991 .323 .057 1.612 .108
Tangibility –.077 –3.033 .003 –.172 –6.148 .000 –.141 –3.758 .000
Business risk .088 3.613 .000 .062 2.319 .021 .071 1.974 .049
Profitability –.034 –1.399 .163 –.042 –1.573 .116 –.008 –.222 .824
Size .224 7.697 .000 .177 5.517 .000 .191 4.417 .000
Ownership .300 9.393 .000 .301 8.568 .000 –.030 –.634 .526
Business relation
with banks .413 13.998 .000 .423 13.022 .000 .403 9.246 .000
Social relation
with banks .205 7.632 .000 .177 5.983 .000 –.102 –2.557 .011
Business
networks .156 6.464 .000 .170 6.390 .000 .285 7.981 .000
Social networks .090 3.729 .000 .092 3.464 .001 .197 5.478 .000
Adj. R-square .713 .652 .372
F – stat 130.140 98.350 31.728
Sig. .000 .000 .000

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 influencing leverage. In general, our findings
support the hypothesis stated that growth is
positively related to debt ratio.
Regarding the association between tangibility
and capital structure, our findings indicate a
negative relation between tangibility and all
measures of capital structure. One possible
explanation for this is derived from the
characteristics of the liabilities structure and the
measure of tangibility. As we discussed in
the descriptive statistics, the long-term debt ratio
accounts for a small proportion (1.93 per cent),
while the other short-term liabilities ratio accounts
for 26.4 per cent — more than half of total
liabilities. As this non-debt portion of liabilities
does not need collateral, and tangibility is
measured as a fixed asset ratio, tangibility is
negatively related to liabilities. The matching
principle in financing can also explain the
association between capital structure and
tangibility. Accordingly, long-term debts are
employed to finance fixed assets, while short-term
liabilities are used to finance working capital.
However, most SMEs in Vietnam operate in the
trade and service sectors, so these firms require
high demand for working capital. Thus, a negative
relationship between tangibility and capital
structure is suitable in the context of Vietnamese
SMEs. Looking into the standardized coefficients,
we found that the tangibility’s effect is relatively
weak, compared with other determinants in the
regression model. In short, the findings do not
support hypothesis 2.
Our results also indicate that SMEs with higher
operating risk tend to use more debt in general,
and short-term liabilities in particular. These
findings do not support hypothesis 3 and conflict
with theory of financial distress. Why is the theory
of financial distress not useful in explaining the
association between risk and capital structure in
Vietnam’s SMEs? During the period 1998–2001,
the credit market was still regulated, and interest
rates were contained within a band set by the State
Bank of Vietnam, rather than by market forces.
Commercial banks were only allowed to offer
interest rates within the confines of that band. As a
ASEAN Economic Bulletin
04 Tran Dinh Khoi 206
result, companies with high business risk could
still get bank loans at interest rates that were lower
than if interest rates were not fixed by the central
bank. This is the main reason explaining why
Vietnamese SMEs with high risk can also
maintain a high debt ratio. Our results are similar
with findings reported by Huang and Song (2002)
in China. A mechanism of controlled interest rates
will negatively impact on the banking system in
general, and the business sector in particular.
As far as profitability is concerned, our findings
generally indicate that profitability has a negative
relationship with all measures of capital structure.
However, the regression coefficient on the debt
ratio and short-term liabilities ratio is statistically
significant when we just consider the effects of
determinants related to a firm characteristics.
Profitability becomes statistically insignificant
when we add such determinants as networking and
relationships with banks in the model. With
respect to the other short-term liabilities ratio, the
regression coefficients are not statistically
significant. Thus, the finding does not provide
strong evidence to support hypothesis 4, stating
that profitability is negatively related to leverage.
In an attempt to explain the insignificance of
profitability in the model of capital structure it is
noted that the financial statements of most
Vietnamese SMEs are not audited, and hence their
reliability is not assured. As a result, a measure of
profitability may not reflect a true picture of a
firm’s efficiency, and retained earnings presented
in an income statement for outsiders, tax offices or
banks need not reflect the real profitability of the
firm. We find a negative correlation between
profitability and two components of the
relationship with banks (see Table 6). It is argued
that the less profitable an SME is, the more
attention it will pay to building up relationships
with banks, in order to facilitate access to credits.
Profitability may become not very important in a
bank manager’s decision to grant credits. In fact,
descriptive statistics show low degree of
profitability among Vietnamese SMEs. Taken
together, when we examine all determinants
related to firm characteristics and management
206 Vo l . 2 3 , N o . 2 , A u g u s t 2 0 0 6
8/1/06, 2:21 PM
 behaviour, profitability is not really a significant
factor that influences leverage decisions in
Vietnamese SMEs.
With respect to hypothesis 5, we find that firm
size has a significant and positive relationship
with all measures of capital structure. In addition,
the standardized regression coefficients also have
a relatively strong impact among all determinants.
This implies that a firm’s size has a strong
influence on the way it finances its operations.
Relatively larger firms will use more debt to
finance their operations, and smaller firms will
finance their operations more through their own
equity, and employ less debt. Van der Wijst and
Thurik (1993) and Chittenden, Hall, and
Hutchinson (1996) also report a positive
relationship between firm size and the debt ratio.
Thus, our findings confirm hypothesis 5.
One possible explanation for this association is
that different stakeholders (commercial banks,
clients, suppliers) in the market are more familiar
with larger firms and therefore issues of
information asymmetry are lessened for decisions
on providing credit. Moreover, larger firms have a
greater bargaining power than smaller firms when
dealing with credit providers, and as a result,
larger firms have more opportunities to get bank
loans, trade credits from suppliers, or other
liabilities from networks.
Firm ownership is considered a special factor
when studying the determinants of capital
structure of SMEs in transitional Vietnam. The
results indicate that the regression coefficients for
the total debt and short-term liabilities ratios are
positive and statistically significant at the 0.01
level. However, the regression coefficient for the
other short-term liabilities ratio is insignificant at
all levels. Taken together, the findings imply that
state-owned SMEs use more debt than private
SMEs, but both groups do not differ from
exploiting other short-term liabilities from
networks to finance their operations. In other
words, state-owned SMEs find it easier to access
bank loans than private SMEs. In general, our
findings provide strong evidence to confirm
hypothesis 6.
ASEAN Economic Bulletin
04 Tran Dinh Khoi 207
The feature of state ownership in Vietnam is the
main explanation for this kind of association.
According to the Law on State-Owned
Enterprises, the Government is the sole owner of
state SMEs. Besides retained earnings, the
owner’s equity in these firms comes from the State
budget. As a result, state-owned SMEs’ financing
tends to be inflexible because managers have no
rights to raise additional equity when necessary. In
most cases of financing new investment and
working capital, state-owned SMEs’ look to state-
owned commercial banks (SOCBs) for credit.
Partly as a result, private SMEs face difficulties in
accessing bank loans. Up to 2002, state-owned
SMEs generally had privileged access to SOCBs,
in terms of collateral, interest rates, guarantees
from third parties, or the credit amount. It can be
said that firm ownership plays a significant role in
the leverage choice of Vietnamese SMEs.
Considering the relationship with banks, our
findings provide strong evidence to support
hypothesis 7. The results show that two factors,
namely “business relations with banks” and “social
relations with banks”, have a significant and
positive association with the debt and short-term
liabilities ratios. It implies that once SMEs pay
more attention to establishing relationships with
banks, they gradually develop bankers’ trust in their
operations. We argued that a good relationship with
banks is a way to reduce asymmetric information,
and this then facilitates SMEs in accessing bank
loans. In an attempt to assess the importance of
each dimension of the relationships with banks, we
find that the standardized coefficients for “business
relations with banks” have a higher value than
“social relations with banks”, as shown in Panel C
(Table 7).
In order to explain the association between
relationships with banks and the debt ratio in
general, and the short-term liabilities ratio in
particular, it is necessary to consider each
dimension of the concept “relationship with
banks”. First, the relationship with banks is
interpreted in the way SMEs exchange
information with banks through financial
statements or any other relevant data. These
207 Vo l . 2 3 , N o . 2 , A u g u s t 2 0 0 6
8/1/06, 2:21 PM
 activities, in line with a long-standing
relationship with banks, often helps banks to
better understand a firm’s operations and credit-
worthiness. In addition, such activities as
“reviewing a bank’s procedures in providing
credit” and “reviewing a bank’s services on a
regular basis” often lead to mutual benefits for
both lenders and borrowers alike.
In another aspect, “social relationships with
banks” refers to how SME managers consider the
hobbies of bank managers, invite them to visit the
firm, or exploit friendship or family relations. We
argue that these social relations play a relatively
important role in doing business in Vietnam where
the contractual legal system is still very weak and
the power of social relations remains strong.
Company visits can provide information about an
SME’s reliability, work habits and business
acumen. It may also reveal the firm’s investment
in plant and equipment, which in turn can serve as
a signal of reliability.
In general, although relationship with banks is
reflected in different aspects, the results support
hypothesis 7 — SMEs that pay more attention to
their relationship with banks will employ more
debt, especially short-term debt, to finance their
operations. Besides firm size, this factor has a
relatively important impact on the determinants
influencing the capital structure of SMEs in
Vietnam.
With respect to networking, our results show
that the regression coefficients on all measures of
capital structure are positive and statistically
significant at the 0.01 level. The above findings
imply that the stronger the level of networking,
the more SMEs tend to employ debt, and
specifically other short-term liabilities, to finance
their operations. The possible explanation for this
association is that once SMEs are strongly
involved in business networks, both parties tend
to benefit, notably in terms of the quality of
goods and prompt payment. We argued that
business networks provide information about a
firm’s reliability, and its creditworthiness to
suppliers or other credit providers. In conclusion,
the results indicate that SMEs that are involved
in networking will be better able to receive trade
ASEAN Economic Bulletin
04 Tran Dinh Khoi 208
credits and other resources to finance their
operations, thereby strongly supporting
hypothesis 8.
V. Conclusion
This study investigated the determinants which
influence the capital structure of Vietnamese
SMEs, over the period 1998–2001. Compared
with similar studies, this research not only
examines the effects of determinants related to
firm characteristics, but also investigates the
aspects of management behaviour in making
capital structure decisions. More specifically, three
main issues are identified and investigated.
First, Vietnamese SMEs employ a debt ratio of
about 43.9 per cent on average. Short-term
liabilities account for a significant proportion of
the capital structure, while long-term debts are
rarely employed by SMEs in Vietnam. Other
short-term liabilities, sourced from networks, are
an additional source of capital for SMEs. We also
found that the various measures of capital
structure vary, depending on the different
ownership structures. Most apparent is the fact
that state-owned SMEs have higher debt ratios
than privately-owned SMEs.
Secondly, we found that firm size and level of
business risk have a significant and positive
relationship with all measures of capital
structure. The features of state ownership and a
banking system that is more supportive of state-
owned SMEs has made firm ownership structure
to be a significant determinant of leverage. The
results also indicate that profitability does not
appear to influence capital structure at any
significant level. Although tangibility has a
negative relationship with the total debt and
short-term liabilities ratios, its effect is not strong
enough to show that agency problems and the
theory of financial distress can explain the
association between tangibility and debt ratios.
Thirdly, determinants related to management
behaviour have a strong impact on a firm’s
capital structure. The stronger its relationship
with a bank becomes, the larger the amount of
bank loans an SME can obtain to finance
208 Vo l . 2 3 , N o . 2 , A u g u s t 2 0 0 6
8/1/06, 2:21 PM
 operations. Furthermore, once SMEs are deeply
involved in networks, they have more
opportunities to obtain trade credits and other
financial resources.
The research offers some important implications
for policy-makers in Vietnam. It should be
recognized that there is an unfair treatment for
private SMEs in accessing bank loans, and the
challenge is to ensure that all business sectors
enjoy the same opportunity to access credit from
commercial banks. A positive relationship between
business risk and debt ratios also reveals that the
government should deregulate interest rates, with
the aim of not only creating a safe banking system,
but also forcing SMEs to set up financing
structures that are appropriate for their specific
degree of business risk.
This study also provides some implications for
SME managers. Managers in the private sector
should recognize that asymmetric information is
a main reason for their difficulties in accessing
bank loans. Once the asymmetric information
between SMEs and lenders is reduced, private
SMEs can receive larger levels of credit from
networks in general, and from commercial banks
in particular. Therefore, managers of private
SMEs should be aware of the importance of
disclosing well-prepared financial statements,
with the aim of building up levels of trust by
banks, through increased transparency. In
addition, SMEs have to build up strong business
networks through discipline in prompt payment,
and maintaining close ties with suppliers. Such
actions can assist SMEs in obtaining other
financial liabilities from networks.
The availability and reliability of financial data
was a major limitation for this research. Financial
statements of most SMEs in Vietnam are not
audited. In addition, over the period 1998–2001,
Vietnamese accounting standards had not yet been
issued. In the future, as company financial data
becomes more reliable and easily available,
subsequent studies could cover a longer period in
order to examine the capital structure of
Vietnamese SMEs in different stages of the
economic cycle. Future research could also
consider the effect of specific industries and
structural models, with the aim of examining the
causal effect of such variables in the capital
structure of firms in Vietnam.

NOTES

1. At the end of 2002, Vietnam’s commercial banking system included 4 state-owned commercial banks (SOCBs),
52 joint-stock banks (JSBs), 23 branches of foreign banks, 4 joint-venture banks (JVBs), and 68 credit co-
operatives.
2. In Vietnam, annual financial statements must be submitted to the Department of Planning and Investment office
where firms register their operations. However, only the financial statements of listed firms have to be externally
audited. In addition, Vietnamese current accounting standards were only issued in 2002. Therefore, the quality of
financial information is less than optimal.

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Tran Dinh Khoi Nguyen is a doctoral student at the Asian Institute of Technology, Bangkok.

Neelakantan Ramachandran is with the School of Management, Asian Institute of Technology, Bangkok.

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