Why do firms invest in an unstable business environment? Investigating formal and informal investment climate institutions in Vietnam

  • Richard Record

Student thesis: Phd


The mainstream investment climate literature often fails to take account the methods that firms in developing countries adopt in order to mitigate the effects of a poor investment climate. A better understanding of these informal "coping strategies" may add to the body of knowledge on what is important, and what isn't, when it comes to prioritising investment climate reforms in developing and transitional economies. Original research from Vietnam, a country which is growing rapidly and in the midst of its transition from plan to market, shows how firms have been able to adapt their business operations given an unstable and partially reformed institutional enabling environment. By comparing the behaviour of manufacturing enterprises across a number of differing local jurisdictions, we are able to discern just how firm level coping strategies adapt. We find evidence that entrepreneurs are able to use a variety of informal institutional mechanisms to invest and operate in an inhospitable business environment where private property rights are not well protected and develop "second best" response mechanisms. These mechanisms include establishing formal and informal networks and linkages, seeking patronage and protection, and by sharing ownership with potential expropriators. We also find evidence that in the face of weak property rights protection, firms adopt approaches to reduce the costs to the original investors if third party expropriation is attempted and are less likely to reinvest retained earnings. Where they do invest, it is principally in dissolvable and/or movable assets, and adopting a higher discount rate or risk adjusted time value of money for capital investments. Similarly, we find evidence of linkages between measures of firm confidence in the local investment climate, and the extent to which firms are willing to employ outside salaried management. Thus, the thesis provides a contribution to the growing literature reviewing the development of formal and informal investment climate institutions in transitional and developing economies. The principle research finding, namely that the establishment and use of informal or second best institutional arrangements can offset some of the costs and risks associated with an otherwise weak and unstable business environment, has important implications for policymakers when it comes to the prioritization of investment climate reforms in developing countries.
Date of Award1 Aug 2014
Original languageEnglish
Awarding Institution
  • The University of Manchester
SupervisorKunal Sen (Supervisor) & Khalid Nadvi (Supervisor)


  • insitutions
  • private sector development
  • development economics

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