Impact of applying human resource management practices on equitized state-owned enterprises' financial performance in Vietnam.

Pham, Long

INTRODUCTION

Vietnam started a profound economic reform in 1986 that aimed to transform the country from a command economy into market oriented economy. From the early days of the economic reform, economic structure reforms and open-door policies have become an integral part of overall economics (World Bank, 1999). As a consequence, Vietnam has substantially elevated its economy and the living standards of Vietnamese people. The country reaped average economic growth rate (GDP) of over 7% during the 1990s and early 2000s, especially more than 8% in 2006, which made it one of the highest growing economies in the World (World Bank, 2006).

These reforms have been occurring in both the public and private sector. In the public sector, one of the most important aims of the State has been to restructure the state-owned enterprises (SOEs) through equitization (privatization) process. This process was initiated in 1992 with the statement of sales of SOEs to the public (Quang & Dung, 1998). This effort can be regarded as one that would convert un-profitable SOEs into more dynamic, fast growing private enterprises, injected with a stronger entrepreneurial spirit (Henrik, 2005).

It is worth noting that Vietnam had about 12,000 SOEs at the outset of its economic reforms; however, financial performance of these SOEs lagged since they lacked incentives to be more efficient and profitable (Vu, 2004). In addition, they utilized a disproportionate level of the country's limited resources, holding approximately 75% of the country's assets, employing 30% of the labor force, and earning 85% of available bank credit; yet, contributing only 40% to the country's GDP (Nguyen, 1995).

The reasons for un-profitability and inefficiency of SOEs are innumerable, but mainly from SOEs management mechanism. This kind of mechanism, largely influenced by the subsidy system, did not motivate managers to be more responsible and open minded as actually practiced in a market economy. Specifically, there was no impetus to utilize business management methods, such as marketing, financial, or human resource management, to improve enterprise financial performance, because managers were not seriously appraised by enterprise results, and employees were not motivated to conduct their work well.

The equitization program has been successful in transforming a significant number of SOEs into equitized SOEs (ESOEs), and the Vietnamese government hopes that these ESOEs will operate their business activities under market conditions, and perform better than their former SOEs. It has been argued that what makes an enterprise effective is not only its financial resource, which ESOEs in Vietnam can manage to have but also important intangible assets such as human resource (Quang & Dung, 1998). Indeed, evidence has shown that economic development is positively related to investment in human capital (Torrington & Huat, 1994). Thus, ESOEs have recently begun to apply HRM practices, ubiquitous in the developed countries, in order to improve their financial performance. This study focuses on theoretically analyzing the effects of certain human resource management practices applied by ESOEs, such as human resource planning, compensation, training, performance appraisal, and recruitment and selection, on enterprise financial performance. More specifically, the objectives of this study are two-fold:

To examine how well are certain human resource management practices applied into ESOEs; and

What effects, if any, do these human resource management practices have on ESOEs financial performance?

BACKGROUND

Equitization is viewed as one of the primary approaches to reforming SOEs in Vietnam. Equitization can be conducted based on the following four forms (MPDF, 1999): (1) retaining state shares intact while selling new shares; (2) selling a given proportion of the existent state shares; (3) detaching and then selling parts of an SOE; and (4) selling off all state shares to workers and private shareholders.

In many countries, equitization has played an important role in setting up private property rights. In Vietnam, the situation is somewhat different due to the fact that there had been a private sector prior to 1998 when the equitization program was aimed at being speeded up. Hence, equitization can also be considered as a means in order to significantly change both the structure of ownership and the firm management mechanisms.

It should be noted that 2,220 SOEs were equitized at the end of 2004. Such enterprises accounted for approximately 40% of the total number of SOEs and owned about 8.2% of all SOEs' total state capital (Le, 2004). It is projected that equitization will be completed by 2010. By that time only about 1,200 SOEs will be completely owned by the state. Over the next year, About 1,460 SOEs will be equitized and among them are a number of large enterprises.

Although there are still many shortcomings pertaining to the equitization process, there are enough reasons for optimism if equitization is placed in the broader context of SOEs reform and private sector development. Firstly, equitization is likely to make favorable conditions for poorly performing firms to mobilize social and financial resources to work better in a new environment after being equitized. Although equitization is partial, gradual, and incomplete, it is still more efficient than 100% public ownership (Fredrik, 2006). According to statistics, ESOEs' chartered capital has significantly increased by 44%, revenue by 23.6%, employees' income by 12%, and dividend yield is 17.11% (Fredrik, 2006). In addition, a nation-wide survey of 261 ESOEs conducted by the Central Institute of Economic Management (CIEM) in 2002 revealed that equitization has had significantly positive effects on the overall performance, financial status, and restructuring of most enterprises. For example, 93% of firms reported that their financial performance improved after equitization.

The reasons for the positive results can be influenced by autonomy, incentives and corporate management. With incentives such as profit sharing, the new owners should be more inclined than the old to pursue efficiency, entrepreneurial opportunity and profits. Additionally, with the SOE constraints on wages being lifted, it is very likely for managers to attract high quality employees and to utilize performance based salary scales to motivate existing employees to effectively and efficiently perform their jobs.

Indeed, the autonomy that comes with equitization means that managers are freed to pursue efficiency, devote their time to things that really matter, which may result in improved performance. It is obvious that there is a relationship between autonomy and corporate governance that can be manifested via asking "who makes which decisions". In this regard, a new cadre of managers has emerged with a dynamic business spirit characterized by the ability of management in efforts to minimize threats and take advantage of opportunities as a consequence of the open-door policy. Managers in ESOEs have no longer to comply with orders coming down from the bureaucratic hierarchical management system, and they have much more room to exercise their own leadership and management competencies. In addition, they are more responsible for decisions they make in terms of firm outcomes, thus making substantial contribution to the performance of firms after equitization.

It is contended that although ESOEs were born via the equitization program, they play a pivotal role in Vietnam's economic growth rate in the coming years, and the success of ESOEs is expected to depend in part on how well managers of ESOEs govern two kinds of the firm resources, namely financial resources and human resources. This study focuses on the latter, and investigates what effects, if any, does the application of certain human resource management practices have on financial performance of ESOEs.

HUMAN RESOURCE MANAGEMENT PRACTICES AND FINANCIAL PERFORMANCE

Human Resource Planning

Little research has been done regarding human resource management practices in Vietnam. This is not surprising in a country where research is still virgin territory, especially in management (Ken, 2001). However, a number of studies exist that concentrate on the challenges of doing business (Von & Clarke, 1995), managers' work values (Ralston et al., 1999), and the examination of economic and investment environment (Kim, 1996; Scown, 1997; Venard, 1998). These scant studies reveal that one of the basic reasons that contributed to the defeat of SOEs is the absence of human resource planning. Thus, it can be expected that ESOEs will implement human resource planning practices in order to provide adequate and competent human capital for better firm performance.

For all enterprises, human resource planning is extremely important because it enables the organization to define and address the overriding people related issues in a meaningful, actionable way (Baird & Meschoulam, 1988). With increased emphasis on productivity, quality, and service, firms now recognize that attention to the financial and technological side of business must be balanced by attention paid to planning human resources (Walker, 2002). Human resource planning ensures that enterprises will have the right people with the right skills and in the right numbers, organized appropriately, and managed effectively (Greer et al., 1989; Schuler, 1989; Mills, 1985).

In addition, it is argued that the merger between strategic and human resource planning, concentrated on customer-employee ties, provides businesses with both strategic and organizational capability which cannot easily be imitated by rivals (Brush & Ruse, 2004). This is likely to generate unity between customers and employees. It also furnishes business with processes to set up strategies and appraise business needs, and to utilize resources to carry out those strategies. It brings about closed links between strategic and human resource planning aimed at generating the synergy and unique expertise of each party needed in the planning process. Finally, it brings about competitive advantage via collaboration, and improves firm financial performance (Ulrich, 2002). Given the fact that ESOEs are making efforts to plan their human resources, and that research suggests a variety of benefits deriving from human resource planning; therefore it is proposed:

Proposition 1--There is a significantly positive relationship between human resource planning and financial performance in ESOEs.

Compensation--Pay for Performance

During the time of centrally planned economy, all SOEs budgets were subsidized by the State. The State also played the role of the sole supplier and the biggest customer of SOEs. Production targets were assigned by the State and all the products had to be delivered back to the State for distribution. Under this system, SOEs did not have to pay attention to customer satisfaction and would only have little concern for business management. The employees and managers of SOEs seemed to avoid their duties by only limiting to what the centrally planned economy system required them to do. SOEs managers and employees were not motivated to perform their tasks due to the fact that no matter what different efforts and performance they made, they were paid the same, which destroyed their working morale. With the transformation of SOEs into ESOEs, it is strongly expected that ESOEs will apply the performance based pay philosophy, which has been overwhelming in firms in the developed economies, so as to inspire enthusiasm, efficiency, and productivity into their human resource capital.

The performance based pay consists of a set of practices that links rewards and bonuses to job performance. Traditionally, staffs are rewarded based on the amount of products they produce, with stock options where rewards are linked to shareholder value, commissions and bonuses, and profit or gain sharing (Rowley, 2003). The pay for performance has been theoretically and empirically supported, regarding the powerful impact it can have on job performance and, ultimately, the competitive advantage of a company. Economic theories, especially expectancy and agency theory, contend that people are inspired to work if they know that their performance is noted and rewarded (Vroom, 1964).

Empirically, research has shown that profit sharing has a positive effect on the financial performance of large firms in manufacturing, construction, and retailing industries (Bhargava, 1994); profit sharing has also been shown to have a positive effect on labor productivity in U.K. engineering firms (Cable & Wilson, 1990); and a negative effect on absenteeism and turnover (Wilson & Peel, 1991). Furthermore, a study of 400 UK and 100 American companies revealed that those using performance based philosophy pay resulted in more than twice the shareholder returns on average than those without (The economist, 1998). In the same vein, Luthans et al. (2001) observed that each dollar of incentive pay brought about a gain of approximately $2.34.

However, there are also studies eliciting the drawbacks of such pay systems. Some have indicated that pay for performance has some moral and practical problems (Kohn, 1993). Firstly, it is considered morally flawed due to the fact that it requires one person to control another.

Secondly, it is viewed as practically wrong due to the fact that pay for performance is very likely to harm productivity (Milkovic & Newman, 2003). Furthermore, the success of performance based pay philosophy is, in a broader context, dependent upon many exogenous variables, such as culture. For example, multinational companies should take culture into account when designing compensation strategies (Gomez-Mejia, 2002), especially CEO compensation (Tosi & Greckhamer, 2004).

While results are inconclusive, a significant number of studies support positive impacts of performance based compensation on firm performance. Therefore, we propose:

Proposition 2--There is a significantly positive relationship between performance based compensation and financial performance in ESOEs.

Training

Human factor is the biggest bottle-neck to Vietnam's economic development. In spite of the fact that the educational system in Vietnam has made significant contribution to the generation of a competent workforce, good management skills are still scant that prevents Vietnam from its economic rejuvenation. It is criticized that universities and training institutes in Vietnam are not really successful in meeting the demand for technical and managerial skills.

According to a recent report in the Vietnam Economics News (1999), in spite of an increasing demand for professions in fields like architecture, marketing, accounting, finance, foreign languages, and computer science, universities and training institutes have lagged to disseminate these disciplines. Some universities are starting to respond to the challenges by focusing on business education, but are unable to fulfill the demand.

Economic reforms and the effects of utilizing new technologies have further enlarged the gap in managerial know-how. In the earlier period of economic reform, it was expected to observe the shortages in managerial skills necessary to interact with foreign firms, improve financial management, and upgrade computer and technical capacities. The failure to handle these issues in the years to come may hinder economic reforms.

Given the critical role of training in providing managers and employees with the technical and managerial skills required, the Vietnamese government has introduced the VND119.4 billion dollar program to assist human resource training for small and medium-sized enterprises, including a significant number of ESOEs (Decision 143/2004/QD-TTg, 2004), for the 2004-2010 period. The decision originates from the fact that human resources are viewed as one of the primary weakest points embedded in small and medium-sized enterprises which are a vital ingredient of Vietnam's socioeconomic development planning.

The program is scheduled into two stages. The first (2004-2008) would conduct surveys on the specific needs of small and medium-sized enterprises for human resource training, and would organize seminars and experience exchanges with both local and foreign organizations to improve the firm performance. The second stage (2008-20010) is expected to involve a variety of training efforts for the development of the necessary skills on administration, marketing, finance, accounting, technology, and human resources.

Research has strongly suggested that training is related to organizational-level outcomes (Kozlowski et al., 2000). It should be noted that a variety of models found in the strategic human resource management literature are utilized to explicate how training is likely to result in better organizational outcomes. For example, a conceptual framework incorporating six theoretical models (e.g., the resource based view of the firm, the behavioral perspective, and cybernetic systems perspective) is developed by Wright & McMahan (1992) in order to thoroughly investigate strategic human resource management. According to their framework and the theoretical models, human resource management practices influence the human resource capital pool and human resource behaviors; human resource behaviors then lead to firm-level outcomes. Therefore,

Proposition 3--There is a significantly positive relationship between training and financial performance in ESOEs.

Performance Appraisal

According to Cascio & Aguinis (2005), performance appraisal is the actual process of gathering information about individuals based on critical job requirements that describes the job-relevant strengths and weaknesses of each individual.

Performance appraisal is believed to play an important role in the human resource process by aiding training and rewarding decisions (Fombrun et al., 1984). It is, therefore, an essential input in career management as a whole. In addition, performance is considered as means to improve company operations, increase efficiency, increase product reliability, productivity and finally firm financial performance (Roberts, 1995; Youndt et al., 1996).

The ability to carry out meaningful performance evaluation on a regular basis and act on them can be regarded as a good test of an organization's human resource management philosophy. There is an agreement in the literature that the effectiveness of performance appraisals substantially depend on whether performance goals are achievable and motivational. This leads to avoiding a very common problem that performance assessments are based on social and political considerations, not on objective criteria of performance (Longenecker et al., 1987). Equally important, feedback should be provided in such a timely and constructive manner that is unlikely to result in either acrimony or unnecessary defensiveness (Conway et al., 2001).

In SOEs, there were many problems embedded in the appraisal system. Such problems consisted of prejudice, favoritism, insufficient knowledge of the employees performance, ignored outcomes, time-consuming, and deteriorating relationships among workers (Quang & Dung, 1998). Obviously, in spite of the fact that there were appraisal systems in SOEs, in almost all situations, it was just a lip-service exercise that both managers and employees manipulated to generate satisfactory outcomes (Quang & Dung, 1998). Therefore, we propose:

Proposition 4--There is a significantly positive relationship between performance appraisal and financial performance in ESOEs.

Recruitment and Selection

In the strategic human resource management literature, selection seems to play a crucial role in the attainment and development of human resource capital. This is regarded as the first step in which the firm seeks to gain the fit between human resource and business strategies. The notion of fit means that by owning the human resource capital that most adequately supports the business strategy, the firm positions itself to bring about competitive advantage through its people management (Schuler & Jackson, 1987). Research suggests that investment in effective selection can be positively related to organizational performance (Terpstra & Rozell, 1993). Studies have also attempted to derive the most efficient and cost effective formal methods (e.g., Anderson & Herriot, 1994; Heneman et al., 1997). As such, methods like assessment centers, psychometric tests, and bio-data have been ranked much higher than interviews (e.g., Reilly & Chao, 1982; Hunter & Hunter, 1984).

In ESOEs, a significant number of efforts have been just implemented in order to further formalize selection procedures consisting of the utilization of entrance examinations and lengthy induction/training periods. In general, the recruitment process is initiated via words of mouth and progresses with comprehensive assessments and analyses of potential candidates' merits and family background. Hence, when the candidates are invited to participate in an interview, it is possible that the interview panel has already had substantial knowledge of the candidates. It is therefore proposed that

Proposition 5--There is a significantly positive relationship between recruitment and selection and financial performance in ESOEs.

CONCLUSION

Vietnam has nowadays been considered as one of the fastest growing economies in the World. The economic development of Vietnam is mainly believed to be attributable to the economic renovation policy initiated in 1986. The economic renovation policy aimed to transform Vietnam into market oriented economy from a closed, centrally planned economy. It has created profound changes in the business environment and labor markets leading to various and unfamiliar challenges for enterprises, making human resource management a vital matter.

The economic renovation policy has been occurring in both the public and private sector. In the public sector, one of the most important aims set up by the State is to restructure the state-owned enterprises (SOEs) through equitization process (SOEs are transformed into equitized SOEs--ESOEs). With this equitization process, the State strongly believes that ESOEs will make more contributions to Vietnam's economic growth rate in the coming time.

It is argued that to survive fiercer competition, ESOEs face the need to raise managerial competencies, especially for human resource management practices, to good levels found elsewhere in the World (McDaniel et al., 1999). Thus, this study theoretically proposed that certain human resources practices will have strong positive relationship with the financial performance of ESOEs.

LIMITATIONS AND FUTURE RESEARCH

This is a theoretical paper that suggests a relationship between HR practices and financial performance of Vietnamese ESOEs. Therefore, empirical work is necessary to support the propositions here presented and gain better understanding on the impact that HR practices have on ESOEs. Additionally, since the purpose of this work is to propose the existence of a relationship between HR practices and financial performance it does not analyze how these practices are implemented and what impact dues culture have in such practices. Future research is necessary to understand what specific practices are used in ESOEs in Vietnam, and how culture influences HR practices in this country.

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Long Pham, New Mexico State University