Growth strategy with social capital, human capital and physical capital—Theory and evidence: The case of Vietnam

• DOI: http://doi.org/10.1111/jpet.12305
• Author: Michel Simioni,Ngoc‐Minh Nguyen,Anh Ngoc Nguyen,Cuong Le Van
• Published date: 01 October 2018
• Date: 01 October 2018

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768 © 2018 Wiley Periodicals, Inc. wileyonlinelibrary.com/journal/jpet Journal of Public Economic Theory. 2018;20:768–787.

Received:18July 2017 Accepted:5 April 2018

DOI:10.1111/jpet.12305

ARTICLE

Growth strategy with social capital, human capital

and physical capital—Theory and evidence: The

case of Vietnam

Cuong Le Van1,2,3,4,5 Anh Ngoc Nguyen1,6 Ngoc-Minh Nguyen6, 7

Michel Simioni8

1IPAGBusiness SchoolUniversité Paris 1, Paris,

France

2CentreNational de la recherche scientifique

(CNRS),Paris, France

3PSE,France

4Academyof Policy and Development, Hanoi,

Vietnam

5TIMAS,Hanoi, Vietnam

6Developmentand Policies Research Center

(DEPOCEN),Hanoi, Vietnam

7Universityof Nantes, France

8INRA,UMR-1110 MOISA, INRA, University of

Montpellier,France

Fundinginformation

VietnamNational Foundation for Science and

Technology,Grant/AwardNumber:502.01-

2017.12

CuongLe Van, IPAGand CES, Université Paris

1,106boulevard de l'Hopital, Paris, France

(Cuong.Le-Van@univ-paris1.fr).

AnhNgoc Nguyen, Development and Policies

ResearchCenter, 12 TrangThi, Hanoi, Vietnam

(ngocanh@depocen.org).

Ngoc-MinhNguyen, Development and

PoliciesResearch Center, Vietnam

(ngocminh@depocen.org).

MichelSimioni, UMR Moisa, 2, place

PierreViala, 34060 Montpellier, France

(michel.simioni@inra.fr).

In this paper, we develop a theoretical model to explain the impact

of social capital (defined at the firm level) on individual firm perfor-

mance and derive a critical optimal threshold for firms to invest in

social capital. The theoretical model we propose reveals how social

capital,human capital, and physical capital simultaneously affect firm

performance under the main assumption of a decreasing function of

social capital on unit cost of physicalcapital. Our theoretical model is

then estimated using unique firm-level longitudinal data from Viet-

nam for the period 2005–2015. Using a control function approach in

a quantile regression framework, we attempt to establish the causal

impact of social capital on firm performance. Our empirical results

point to a range of revenue in which investment in social capital is

efficient and to evidence suggesting that the role of social capital

decreases when firms become richer.

1INTRODUCTION

The concept of capital does not simply stand for physical capital;it also implies nonphysical resources such as human

capital in the form of managerial talent as well as education, training, and professional ability of the workers in

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enterprises (Crook et al., 2011;Roca-Puig, Beltran-Martin, & Cipres, 2011). Likewise, the concept of social capital

underlies social relationships matter in the sense that they can have a positive impact on the wealth of society and its

members, that is, individuals, households, and firms, by reducing transaction costs, facilitating collective actions, and

lowering opportunistic behavior (Servaes & Tamayo, 2017). During the past few decades, social capital has become an

area of active research, first in social sciences stemming from pioneering works by Coleman (1988), Putnam, Leonardi,

and Nanetti (1993), Helliwell and Putnam (1995), and Granovetter (1985, 1995), and later in economics (e.g., Andriani

& Christoforou, 2016; Barr, 1998; Fafchamps, 1998; Glaeser,Laibson, and Sacerdote, 2002;Grootaert, 1998; Lund &

Fafchamps, 1997;Narayan & Pritchett, 1997). In fact, one could trace the origin of this concept back as early as 1937

to Ronald Coase in his seminal work, “The Nature of the Firm”,in which he concluded that a firm consists of “the sys-

tem of relationships which comes into existence when the direction of resources is dependent on an entrepreneur”

(pp. 41-42), or to the studies by Arrow (1972) showing how social connections can compensate for expensive formal

structures in facilitating financial transitions, and by Kreps, Milgrom, Roberts, and Wilson (1982) on how increased

interaction facilitates cooperation. More recently,social capital has become a popular concept with policy makers in

both developed and developingcountries (OECD, 2002;WorldBank, 2011).

In the earlier literature, social capital is often defined for a community,society, and/or country as a whole and typi-

cally is measured by the civic engagement of the population or the willingness of peoplein a society to trust each other.

Putnam (1993, 2000), for example, finds a high and positivecorrelation between various proxies for civic engagement

and economic performance across regions of Italy.Helliwell and Putnam (1995) showed that there is a strong conver-

gence of per capita income among the Italian regions during the 1960s and 1970s. The more social capital a region has,

the faster convergence is, leading to a higher equilibrium income level.La Porta, Lopez de Silanes, Shleifer, and Vishny

(1997) use average individual surveyresponses to country levelfrom the World Values Survey to explore the relation

between social capital and economic outcomes, and find that trust is related to growth in gross domestic product, the

size ofthe largest firms in the economy, tax compliance, and the lack of corruption. More recent studies have attempted

to link aggregate-levelsocial capital to individual households. For example, Guiso, Sapienza, and Zingales (2004) report

that social capital levelin an area could influence behavior of households with respect to use of checks, less investment

in cash and more in stocks, higher access to institutional credit, and less use of informal credit.

In the more recent economics literature, social capital has been defined for individuals and firms. Previous studies

on how social capital helps agricultural traders overcome transaction costs in three African countries by Fafchamps

and Minten (1999, 2001) are the pioneering attempts to measure social capital and estimate its impacts at individual

and firm levels.In these studies, social capital, proxied by business contacts, is used by traders to overcome transaction

costs through a reduction in information and search costs and through substitution for poor market institutions. In our

empirical analysis, we also use contacts as proxy for social capital at the firm level.

Theoretically,the early work by Glaeser et al. (2002) is perhaps the first paper that formally treats social capital at

the individual level. In this model, investingin social capital is treated as an investment decision for social capital accu-

mulation, similar to investment in physical and human capital. Our theoretical model differs from Glaeseret al. (2002)

in at least two fundamental aspects. First, we explicitly model whysocial capital is needed, and second, we identify the

critical threshold that firms need to invest in social capital. In doing so, we have attempted to address Solow's (1995)

criticism of the earlier social capital literature that “there needs to be an identifiable process of investment that adds

to the stock of social capital, and possibly a process of depreciation that subtracts from it.”

Social capital has also been defined for firms and corporations in previous studies andas one of the major elements

that supports entrepreneurs in improving their production and facilitating business activities. Leana and van Buren

(1999) coined the term organizational social capital to denote “a resource reflecting the character of social relations

within the firm.” Indeed, social capital accelerates firms'access to resources that are not under their control through

providing a finer grained information set (Uzzi, 1997) and/or giving much information about new innovation (Burt,

1987) and potential employees (Burt, 1992;Fernandez,Castilla, & Moore, 2000). Therefore, firms could reduce trans-

action costs and achieve higher profitability levels(Appold, 1995;Billand, Bravard, Chakrabarty, & Sarangi, 2016; Dev,

2016; Fujita & Thisse, 2002;Sabel, 1989;Scott, 1988).