Institutional Quality and Internationalization: Empirical Evidence from Manufacturing SMEs in Vietnam

Abstract

This paper assesses how the local institutional environment affects the internationalization of manufacturing small- and medium-sized enterprises (SMEs) in Vietnam, exploiting a multi-dimensional institutional index and large-scale enterprise data. The authors find that the internationalization of manufacturing SMEs was influenced by several institutional aspects, such as the transparency of local authorities, access to land, informal charges, and local labor policies. Improvements in these institutional aspects can substantially enhance participation in international trade and its magnitude. This pattern diverges from their large and foreign counterparts, whose trade participation is primarily affected by land access and the transparency of local authorities. Additionally, the authors find heterogeneous effects of the institutional environment on SMEs in different manufacturing industries. Heavy industries rely more on the costs of entry and time costs, while land access is crucial for SMEs in manufacturing industries that require large-sized factories. Our findings suggest that the government should provide a supportive institutional environment to SMEs, which will lead to higher international participation and boost domestic economic growth.