University of Economics International institute of Social Studies Ho Chi Minh City, Vietnam Erasmus University of Rotterdam The Neth erlan d VIETNAM- THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ECONOMIES OF SCALE AND INPUT COSTS EFFICIENCY OF COMMERCIAL BANKS IN VIETNAM, 2006-2014 By Dang Tri Dung Supervisor Dr Vo Hong Duc Thesis submitted for the Degree of Master of Art in Development Economics Vietnam Netherlands Programme, November 2013 University of Economics Ho Chi Minh City, Vietnam VIETNAM- THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ECONOMIES OF SCALE AND INPUT COSTS EFFICIENCY OF COMMERCIAL BANKS IN VIETNAM, 2006-2014 By Dang Tri Dung A thesis submitted in Partial fulfillment of the Requirements for the Degree of Master of Art in Development Economics Under the supervision of Dr Vo Hong Duc Vietnam - Netherlands Programme, November 2015 DECLARATION I hereby declare that the thesis "Economies Of Scale And Input Costs Efficiency Of Commercial Banks In Vietnam, 2006-2014" was made by myself under the supervision of Dr Võ Hồng Đức I also hereby declare that all the data and the results of this thesis are collected and calculated by me In addition, the conclusions and recommendations are not copied by any research Đặng Trí Dũng The above declaration is affirmed Dr Võ Hồng Đức i ABSTRACT This study is conducted to determine and quantify the performance of the commercial banks in Vietnam in relation to their economies of scale and the possibility of substitute of inputs in their operations Data used in this study were collected from 32 commercial banks in Vietnam for the period from 2006 to 2014 The Iterate Semmingly Unrelated Regression (ITSUR) with the support of STATA software is used in this study The findings from this study provide empirical evidence to confirm that the operation scale of the commercial banks in Vietnam is increasing return to scale This means that increasing the scale of operations from the commercial banks in Vietnam may result in an increase of their profitability This finding appears to be consistent with a merger and acquisition taking place in the Vietnam’s banking system at the moment with the lead of the State Bank of Vietnam In addition, the commercial banks in Vietnam have demonstrated that cost inefficiencies during operations are problematic The three key inputs of commercial banks during their operations are labor, financial capital and fixed assets are all inelastic and as such, they may be substitute for one another As such, controlling labour costs appears to be essential for the efficient operations of the commercial banks in Vietnam Empirical findings from this empirical study are drawn to provide some implications for both the commercial banks and the State Bank Vietnam in relation to the scale efficiency of operations for the commercial banks and the leading roles of the central banks in providing guidance and assistance for the entire banking system to grow further Keywords: Ecnomies of scale; Financial capital; Labor; Fixed assets; Elasticity; Commercial banks; Vietnam ii ACKNOWLEDGMENT I sincere thanks to my supervisor Dr Vo Hong Duc He was enthusiastically helped and gave me advice during the research process Dr Vo Hong Duc suggested useful ideas for my research In addition, I am also wish to thank to all the lecturer of the VietnamNetherlands program The lecturers helped me to get the knowledge of development economics Furthermore, the teachers helped me to know the research methods in the economic field iii DECLARATION ABSTRACT ACKNOWLEDGMENT CONTENTS LIST OF TABLES LIST OF FIGURES ABBREVIATIONS CHAPTER INTRODUCTION 1.1 Problem Statements 1.2 Research Objectives 1.3 Research Questions 1.4 The Scope of this Research 1.5 Methodology 1.6 The Structure of the Study CHAPTER LITERATURE REVIEW 2.1 Overview of the Commercial Banking System 2.2 Studies On The Scale Economies Of Commerc 2.3 Studies On The Price Elasticity Of Inputs In B 2.4 Translog Cost Function Theory 2.5 The Estimation Method Of The Scale Econom 2.5.1 Estimation Method Of The Scale Econ 2.5.2 The Own-Price Elasticity And Cross-P CHAPTER RESEARCH METHODOLOGY 3.1 The Hypothesis Testing 3.2 Identification Of Variable iv 3.3 Data Collection And Expected Results 3.4 The Research Methodology CHAPTER EMPIRICAL RESULTS 4.1 Descriptive Statistical Analysis 4.2 Regression Results 4.2.1 The Results From Translog Cost Func 4.2.3 The Result Of The Scale Economies 4.2.4 The Own-Price Elasticity and Cross-P CHAPTER CONCLUSIONS AND POLICY IMPLICATIONS 5.1 Conclusions 5.2 Policy Implications 5.3 Limitations And Future Research APPENDIX A APPENDIX B APPENDIX C APPENDIX D APPENDIX E APPENDIX F APPENDIX G APPENDIX H APPENDIX I v APPENDIX J 79 APPENDIX K 80 vi LIST OF TABLES Table The Variables Of Equation System That Analyzes The Relationship Between Financial Capital And Labor 15 Table The Variables Of Equation System That Analyzes The Relationship Between Financial Capital And Fixed Assets 16 Table The Variables Of Equation System That Analyzes The Relationship Between Labor And Fixed Assets 16 Table The Dependent Variables 21 Table The Independent Variables 22 Table Statistics Of Variables In The Equation System (9) 32 Table Statistics Of Variables In The Equation System (10) 33 Table Statistics Of Variables In The Equation System (11) 33 Table The Correlation Matrix Of Variables In The Equation System (9) 34 Table 10 The Correlation Matrix Of Variables In The Equation System (10) 34 Table 11 The Correlation Matrix Of Variables In The Equation System (11) 35 Table 12 The Results Of The Equation System (09) 36 Table 13 The Results Of The Equation System (10) 37 Table 14 The Results Of The Equation System (11) 38 Table 15 The scale economies of Vietnam Commercial banks in 2006-2014 41 Table 16 The scale economies of Joint stock commercial banks and State commercial banks in 2006-2014 41 Table 17 The Own-Price Elasticity And Cross-Price Elasticities From Two Outputs Model 44 Table 18 The Own-Price Elasticity And Cross-Price Elasticities From Models Including Loan 45 Table 19 Models The Own-Price Elasticity And Cross-Price Elasticities From Including Deposits 46 Table 20 The Relationship Between The Inputs 47 APPENDIX B Bank ACB ACB ACB ACB ACB ACB ACB ACB ACB ABB ABB BID BID BID BID BID BID BID BID BID CTG CTG price of Year fund 2006 2007 2008 2009 2010 2011 2012 2013 2014 2012 2013 2006 2007 2008 2009 2010 2011 2012 2013 2014 2007 2008 price of capital -0.0763 -0.0654 -0.0475 -0.0752 -0.0412 -0.0228 -0.0825 -0.1084 -0.1324 -0.1208 -0.1172 -0.0305 -0.0275 -0.042 -0.0839 -0.0684 -0.0319 -0.2932 -0.2686 -0.0692 -0.0718 -0.0904 CTG CTG CTG CTG CTG CTG DongA DongA DongA DongA DongA DongA DongA DongA EIB EIB EIB EIB EIB EIB EIB EIB EIB Giadinh Giadinh Giadinh Giadinh Giadinh 2009 2010 2011 2012 2013 2014 2006 2007 2008 2009 2010 2011 2012 2013 2006 2007 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 -0.1799 -0.1083 -0.0579 -0.077 -0.0999 -0.1111 -0.1017 -0.0708 -0.0318 -0.102 -0.0922 -0.0734 -0.0702 -0.102 -0.0804 -0.1072 -0.0386 -0.1266 -0.0466 -0.0163 -0.0352 -0.0713 -0.09 -0.1686 -0.1685 -0.0865 -0.046 -0.0204 Giadinh HBB HBB HDB HDB HDB HDB HDB Kienlong Kienlong Kienlong Kienlong Kienlong MBB MBB MBB MHB MHB MHB MSB MSB MXB MXB MXB MXB Nam A Nam A Nam A 2013 2010 2011 2008 2009 2010 2012 2013 2008 2009 2010 2011 2012 2012 2013 2014 2006 2007 2009 2006 2007 2010 2011 2012 2013 2006 2007 2010 -0.0187 -0.0143 0.0201 -0.0057 -0.0671 -0.0353 -0.0284 -0.0531 -0.1254 -0.1305 -0.0507 -0.0652 -0.115 -0.0692 -0.096 -0.1095 -0.0768 -0.0935 -0.0572 -0.0517 -0.0343 -0.0549 -0.1772 -0.3185 -0.3533 -0.0926 -0.0578 -0.0444 Nam A Nam A Nam A NVB NVB NVB NVB NVB NVB NVB NVB NVB PGB PGB PGB PGB PGB PNB PNB PNB PNB PNB PNB PNB SCB SCB SCB SCB 2011 2012 2013 2006 2007 2008 2009 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2006 2007 2008 2009 2010 2011 2012 2008 2009 2010 2012 -0.024 -0.0354 -0.0941 -0.363 -0.1207 -0.0457 -0.0231 -0.0562 -0.0433 -0.1146 -0.1377 -0.1105 -0.0789 -0.0657 -0.1264 -0.1393 -0.1627 -0.0447 -0.0702 -0.0113 0.0022 0.0127 0.0359 0.0416 -0.0049 0.0034 0.0164 -0.02 SCB SGB SGB SGB SGB SGB SHB SHB SHB SHB SHB SHB SHB SHB STB STB STB STB STB STB STB STB STB Techcom Techcom Techcom Techcom Techcom 2013 2008 2009 2010 2012 2013 2007 2008 2009 2010 2011 2012 2013 2014 2006 2007 2008 2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 0.0074 -0.0216 -0.0907 -0.0742 -0.0771 -0.1157 -0.0641 -0.0251 -0.0998 -0.0726 -0.0379 -0.0428 -0.0713 -0.0467 -0.1404 -0.1026 -0.0498 -0.102 -0.072 -0.0843 -0.1169 -0.1446 -0.162 -0.0714 -0.0383 -0.006 -0.0612 -0.1025 Techcom VCB VCB VCB VCB VCB VCB VCB VCB VIB VIB Vieta Vieta Vieta VNCB VNCB VPB VPB VPB WEB WEB WEB WEB WEB WEB WEB 2014 2007 2008 2009 2010 2011 2012 2013 2014 2013 2014 2008 2009 2010 2010 2011 2012 2013 2014 2006 2007 2008 2009 2010 2011 2012 -0.1079 -0.0429 -0.0297 -0.1232 -0.1097 -0.055 -0.0699 -0.0915 -0.2598 -0.1459 -0.1523 -0.033 -0.0959 -0.0713 -0.0337 0.0151 -0.0651 -0.1224 -0.1557 -0.1412 -0.0938 -0.0723 -0.0287 -0.0566 -0.03 -0.0363 APPENDIX C The result of The equation system (9) for two outputs 72 APPENDIX D The result of The equation system (9) for Loan output 73 APPENDIX E The result of The equation system (9) for Deposit output 74 APPENDIX F The result of The equation system (10) for Two outputs 75 APPENDIX G The result of The equation system (10) for Loan output 76 APPENDIX H The result of The equation system (10) for Deposit output 77 APPENDIX I The result of The equation system (11) for Two outputs 78 APPENDIX J The result of The equation system (11) for Loan output 79 APPENDIX K The result of The equation system (11) for Deposit output 80 ... ECONOMICS ECONOMIES OF SCALE AND INPUT COSTS EFFICIENCY OF COMMERCIAL BANKS IN VIETNAM, 2006- 2014 By Dang Tri Dung A thesis submitted in Partial fulfillment of the Requirements for the Degree of Master... operation scale of the commercial banks in Vietnam is increasing return to scale This means that increasing the scale of operations from the commercial banks in Vietnam may result in an increase of. .. determine and quantify the performance of the commercial banks in Vietnam in relation to their economies of scale and the possibility of substitute of inputs in their operations Data used in this