“Tax incentive policy and firm performance: evidence from Vietnam”

This paper aims to assess the impact of the tax incentive policy on firm performance after privatization in Vietnam. Using research data of 260 privatized enterprises in Vietnam, this study sheds light on whether tax incentive policies can help improve firm performance after privatization. The paper utilizes a pre-post comparison approach proposed by Megginson, Nash, and Van Randenborgh (1994). The research results reveal that privatized enterprises with tax incentives have improved profitability (ROA, ROE, ROS) and operating efficiency (NIEFF) and reduced leverage after privatization. A statistical reduction in the number of employed and an improvement in output (real income) after privatization are not observed. Besides, there is no statistical evidence proving that privatized enterprises have experienced significant changes in standard deviations of firm performance measures after privatization in Vietnam. Given signifi- cant improvements in the profitability of post-privatized enterprises with tax incentives, the authors propose some managerial implications for the Vietnamese govern- ment, investors and non-privatized state-owned enterprises (SOEs). and Guedhami (2008). Iwasaki and Mizobata (2018), Bachiller (2017) use a meta-analysis to explore the impact of privatization on firm performance. Pham (2017, 2019), Sakr (2014), Alipour (2013), Loc, Lanjouw, and Lensink (2006), and Tran, Nonneman, and Jorissen (2015) compare changes in firm performance of privatized SOEs in Vietnam. Hung, Thien, and Liem (2017) compare firm performance between privatized SOEs and private firms. In general, these studies only consider inflation when calculating output (real sales), but they do not consider inflation when calculating operating efficiency (sales efficiency, net income efficiency), so conclusions about improving operating efficiency are inconsistent. Megginson


INTRODUCTION
Privatization in Vietnam includes three phases; the third phase started in 2008. However, the number of enterprises participating in privatization dropped sharply during the third phase because small and medium-sized SOEs were privatized earlier in the first two phases.
Megginson (2017), Estrin and Pelletier (2018) argue that the impact of privatization on firm performance attracts researchers because they have conflicting results about the impact of privatization, and the privatization process is still incomplete in China, Vietnam, and some other transition economies. Empirical studies in developed countries include research works by Megginson, Nash, and Van Randenborgh (1994), Sakr (2014), and Alipour (2013), while in developing and transition economies they include Boubakri, Cosset, and Guedhami (2008). Iwasaki and Mizobata (2018), Bachiller (2017) use a meta-analysis to explore the impact of privatization on firm performance.
Pham (2017, 2019), Sakr (2014), Alipour (2013), Loc, Lanjouw, and Lensink (2006), and Tran, Nonneman, and Jorissen (2015) compare changes in firm performance of privatized SOEs in Vietnam. Hung, Thien, and Liem (2017) compare firm performance between privatized SOEs and private firms. In general, these studies only consider inflation when calculating output (real sales), but they do not consider inflation when calculating operating efficiency (sales efficiency, net income efficiency), so conclusions about improving operating efficiency are inconsistent. Megginson Dewenter and Malatesta (2001) compare the performance of 63 large-scale enterprises in the Fortune 500 report from 1981 to 1993 and confirm a significant increase in profitability and a decrease in financial leverage and labor after privatization. According to Harper (2002), privatization helps SOEs to be more efficient in profitability, productivity, and ability to utilize capital in the Czech Republic in general. Rakhman (2018) argues that partially privatized SOEs perform at least as effective as private firms for 13 consecutive years in Indonesia.

LITERATURE REVIEW
Brown, Earle, and Telegdy (2016) use a data set of 70,000 firms in five East European economies and find that privatization raises measures of profitability, productivity and growth. Arocena et al. (2012) and Mager and Jesswein (2010) conclude that firms significantly increase real sales, become more profitable, and improve their operating efficiency after being privatized. Amess and Roberts (2007) show that before privatization, state-owned SOEs have lower labor productivity than stateowned enterprises in Poland. Farinos, Garcia, and Ibanez (2007) also find that there are significant operating improvements in Spanish SOEs after privatization. Bachiller (2012) concludes that only the performance of companies in the utility industry is significantly better after privatization in European companies. However, Mckenzie and Keneley (2011), Aussenegg and Jelic (2007) and Farinos et al. (2007) find that there are no significant improvements in the profitability and efficiency of privatized SOEs. Boubakri, Cosset, and Guedhami (2008) argue that in developing countries privatized enterprises have increased profitability, net sales, investment capital, productivity, labor productivity, and dividend payout and decreased debt level. Privatization has a positive impact on the firm performance of the aviation industry in the Kenyan aviation industry, with specific reference to Kenya Airways Limited (Ochieng & Ahmed, 2014). The research result is consistent with the study by Sakr (2014). However, Alipour (2013) explains that privatization does not have a positive effect on the profitability (ROS, ROE, and ROA) of the firms listed on the Tehran Stock Exchange; instead, the effect has been negative. Oqdeh and Abu Nassar (2011) also find that there is no significant increase in profitability after privatization at both full samples, as well as sub-samples level.
Wei, Varela, D'Souza, and Hassan (2003), Huang and Song (2005) find an increase in production, sales efficiency, and a reduction in financial leverage in China. However, Liao, Liu, and Wang (2014) find that privatization does not improve operating efficiency and corporate governance. However, the authors confirm that firm operating revenue increases significantly after the reform. Tu, Lin, and Liu (2013) explain that there is a political connection after privatization in China. Privatization in China does not help reduce the dominant role of the State in privatized firms (Gan, 2009). This result is consistent with research work by Jiang, Yue, and Zhao (2009). Loc et al. (2006) state that there is an improvement in firm performance after privatization in Vietnam, including profitability and operating efficiency; besides, privatized SOEs tend to reduce leverage and labor after privatization. Hung et al. (2017) argue that privatized firms have a higher ROE than private firms because privatized firms are easier to issue shares after privatization. Tran et al. (2015) show that privatized firms perform better after privatization, especially in terms of profitability. However, there is a reduction in profitability and an improvement in working capital management or financial leverage of privatized SOEs in Vietnam (Pham, 2017; Pham & Nguyen, 2019).
However, most of the above studies have not examined how tax incentive policy helps privatized SOEs improve firm performance. Radygin (2014) argues that countries use several incentive policies to speed up the privatization process, and this leads to stagnation in the financial market development. Aslund (2013) argues that privatization incentive policies have a positive effect on the performance of privatized SOEs, but these policies are likely to lead to unfair competition for businesses. Vietnamese government issued Decree No. 164/2003/ ND-CP on December 22rd, 2003, detailing the implementation of the Law on Enterprise Income Tax (CIT). According to this Decree, privatized SOEs could get a deduction of 100% corporate income tax for the first two years and a reduction of 50% corporate income tax for the next two years if these SOEs participated in privatization programs from 2004 to 2007. The tax incentive policy for privatized SOEs is also one characteristic in Vietnam. This policy directly affected profit after tax and reinvestment activities of privatized SOEs in this period. Therefore, the first hypothesis is as follows: H1: Only state-owned enterprises with incentives significantly improve firm performance after privatization.
Cuervo and Villalonga (2000) explain that the firm performance of privatized enterprises depends on privatization methods, business strategies, and ownership structure. Therefore, the firm performance of equitized SOEs in the post-privatization period may be unstable compared to the pre-privatization period due to competition with private enterprises. Therefore, this study also assesses the stability of firm performance by examining changes in the standard deviations of firm performance measures through four-year privatization windows in Vietnam. Iwasaki and Mizobata (2018) also conclude that differences between countries in location, a privatization method, and speed of policy implementation strongly affect firm performance. Based on the research results by Cuervo and Villalonga (2000), Iwasaki and Mizobata (2018) and Bachiller (2017) that privatized enterprises operate unstably

Data
The data set includes the firm performance information from survey results of the General Statistics Office, Vietnam. The data set includes 260 SOEs privatized from 2006 to 2014. The paper provides data on the privatized enterprises up to 2014 to ensure that there are four years after this point to calculate the mean value of firm performance after privatization.

Methodology and measurement
This paper adopts the pre-post comparison method with four-year privatization windows to measure changes in firm performance.
Unlike previous studies in Vietnam, this study uses the World Bank's CPI with the base year of 2010 to calculate net sales, real assets, and net profit after tax before calculating firm performance meas-ures. The paper also uses total assets turnover proposed by Huang and Song (2005). Thus, the following measures are applied, presented in Table 3. Table 4 shows that most of the privatized SOEs belong to the manufacturing and construction industries with 143 enterprises (accounting for 55%), followed by privatized SOEs in the service sector, including 106 enterprises (accounting for 40.77%).

Descriptive statistics
The sample includes 260 SOEs privatized in the second and third privatization phases in Vietnam, in which large-scale enterprises make up the majority with 204 enterprises (accounting for 78.46%). The sample is also divided by listing status and tax incentives. Table 4 shows that most privatized SOEs are unlisted (accounting for 63.46%).

Operating efficiency
There are no improvements in operating efficiency (SALEFF) and Total Assets Turnover (TAS) after privatization because the output is not improved (RSAL). However, NIEFF is increased by VND 44.237 million/employed after privatization because tax incentive policies help privatized SOEs increase net income, while there is no significant change in labor after the privatization of privatized SOEs with tax incentives.
Meanwhile, previous studies in developed and developing countries show that there is an increase in the operating efficiency of privatized enterprises, including operating efficiency (SALEFF) and TAS (Farinos et

Output
When considering the inflation rate in Vietnam (CPI) to determine real sales of privatized SOEs, the results from Table 6 show that privatized en-  (2007) argue that post-privatization firms often reduce labor because of pursuing the goal of maximizing profits and reducing labor costs or even modernizing production.
Leverage Table 6 also shows that there is evidence to confirm a change in leverage after privatization compared to the post-privatization period. Privatized SOEs with tax incentives reduce the use of debt after privatization because they change their objectives from maximizing revenue to maximizing profits and using lower leverage in the post-privatization period, thereby reducing debts and production costs (leverage decreased by 9.1%). The results of this study also contradict conclusions of previous studies that the post-privatization enterprises would be more likely to use debt when issuing shares, leading to expanding operations (

Firm performance changes by industry groups, listing status, and firm size
If considered by industry groups, privatization does not help privatized SOEs with tax incentives in agriculture, fishing, and aquaculture, and mining sectors improve firm performance after privatization (Appendix A1). The results also show that there is no evidence of changes in the standard deviations of firm performance measures. However, privatized enterprises in manufacturing and construction have a significant improvement in performance, in particular, profitability (ROS increased by 3.5%, ROA increased by 3.4%, ROE increased by 13.0%) and operating efficiency (SALEFF increased by VND 240.230 million/employee) after privatization (Appendix A2). These enterprises also tend to decrease real sales by VND 110,234.560 million and to reduce the number of employees after privatization (185.964 employees on average) in order to focus on maximizing profits and re-structuring business activities. Enterprises in the manufacturing and construction sectors also tend to reduce their leverage ratio (by 11.7%) after privatization by reducing debt to total assets to avoid operational risks. However, these privatized SOEs do not improve output (real sales) due to operational restructuring and debt reduction after privatization. The research results also show that these enterprises do not change standard deviations of firm performance measures in general (except for ROA, SALEFF), which shows that privatized enterprises do not have many breakthrough changes in their operations.
Similarly, privatized SOEs in the services sector do not change much in terms of firm performance after privatization. There is a significant improvement in profitability (ROA increased by 2.1%) and operating efficiency (NIEFF increased by VND 81.277 million/employee) (Appendix A3). However, privatized SOEs in the services sector do not improve their operating efficiency (SALEFF, TAS) and output (RSAL) after privatization. Also, research results show that there is no evidence that service enterprises reduce labor and leverage after privatization.
Manufacturing, construction, and service enterprises with tax incentives have improvements in profitability and operating efficiency. This result is consistent with the fact that state representatives still hold relatively high ownership of enterprises after privatization, along with the ability to adapt to the low competitive environment of newly privatized enterprises. A vital theory that explains the competitiveness of the environment affecting businesses and a country is Porter's competitive advantage theory (Porter, 1990 Considering the firm size, small and medium-sized enterprises do not improve firm performance after privatization (Appendix A6). They also do not improve output and do not reduce leverage after privatization, while there is a reduction in labor after privatization (47.208 employees on average). Thus, privatization does not help small and medium-sized enterprises improve their performance, and these enterprises are often in the agriculture and fishery sectors with a low competitive business environment. However, large-scale SOEs are likely to improve their performance after privatization. Large-scale enterprises improve profitability (ROS increased by 3.7%, ROA increased by 3.6%, and ROE increased by 12.2%) (Appendix A7). There is also a significant improvement in the operating efficiency of large-scale SOEs (NIEFF increased by 55.383 million VND/employee).
Large-scale enterprises are often state-owned corporations but belong to highly competitive industries, so they operate more effectively after privatization. Large-scale enterprises also tend to reduce 187,594 employees on average after privatization to reorganize production and business activities, reduce labor costs, and reduce leverage (LEV decreased by 9%). Thus, large-scale enterprises also cut costs and reduce risks after privatization. Also, changes in standard deviations of firm performance measures through four-year privatization windows are not statistically significant in general (except for standard deviation changes in ROA and LEV of large-scale privatized SOEs).

DISCUSSION
In general, the study affirms to accept one part of the first hypothesis when privatized enterprises with tax incentives have improved profitability (ROA, ROE, and ROS), operating efficiency (NIEFF), and reduced leverage after privatization. Also, there is no statistical reduction in the number of employed and no improvement in output (real revenue) after privatization. Privatized SOEs without tax incentives do not have significant improvements in profitability (except for ROA) and Research results also show that improvements in firm performance vary according to industry groups, listing status, and firm size of privatized SOEs with tax incentives.

CONCLUSION
The research results show that the tax incentive policy significantly helps state-owned enterprises improve firm performance after privatization. Given significant improvements in the profitability and operating efficiency of post-privatized enterprises with tax incentives, some policy implications are proposed.
The Vietnamese government should speed up the privatization program because the enterprises after privatization still have a significant increase in profitability in some cases. Privatized enterprises have the opportunity to participate in the market mechanism after privatization, which is no longer subject to the State's control, so that firm performance will be significantly improved in the long run. The Vietnamese state should not continue other incentive policies for privatized SOEs because it created an unfair competition environment with private firms and privatized SOEs with incentive policies that cannot adapt to a competitive business environment.
Investors should not consider investing in short-term IPO transactions because privatized enterprises cannot improve much in the short term. However, investors need to carefully consider whether to invest in an IPO, as enterprises are usually not listed immediately after privatization in Vietnam, which forces investors to wait long for the initial abnormal returns to sell shares on the secondary market.
Non-privatized SOEs should continue to actively register for privatization, if not yet implemented, because privatization also helps to significantly increase profitability in the long run. Managers of non-privatized enterprises should set appropriate objectives and long-term strategies after privatization because they have to compete with private enterprises and foreign-invested enterprises in the same sectors after privatization.
This paper analyzes whether the tax incentive policy helps improve firm performance of privatized SOEs after privatization in Vietnam. However, it does not consider the impact of privatization on firm performance of privatized SOEs when considering both privatized SOEs and non-privatized SOEs.