The Effects of Local Business Environments on Smes' Performance: Empirical Evidence from the Mekong Delta

Abstract

This paper investigates how SME's local business environment affects its performance. Theoretical arguments for business environment and performance go in both directions. That is, on the one hand business environment enhances SME’s performance; on the other hand it also impedes its operation. Using these arguments, we hypothesise that both favor treatment of local government for state-owned companies and bribery (or "speed money") are negatively related to SME’s performance. Promotion policies of local government for private firm and local labour force have positive effects on SME’s performance. We test these hypotheses in a survey data from 63 manufacturing and service SMEs locating in three provinces of the Mekong Delta within the period of 2011 and 2012. Using fixed effect and random effect models, the empirical results release that local government’s favour policies for private firms and labour force have positive effects on SMEs’ performance. The results revealed that although bribery has positively related to SME’s performance, this relation becomes negatively when the level of bribe is high. A major implication is that the study provides better understanding for SMEs in addressing the local environment factors, which significantly affect SMEs’ performance. The results of this study can also be used as reference for anyone who is interested in start their own business providing insights into decision-making in starting a business and also for any SMEs which are interested in continuing to sustain and grow. In addition, bribery enables SMEs to use government resources, avoid red tape, and thus foster revenues. High levels of "speed money" increasingly absorbs the returns on SME activities, and distort entrepreneurial spirit and behaviour because favourable relationships with public officials provide entrepreneurs legitimacy and thus decrease the risk for closure.