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Impacts of switching from business households to enterprises on the financial performance

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Abstract

This study aims to elucidate whether switching from business households to enterprises brings higher financial performance than not switching. The study was carried out in Thanh Hoa province, Vietnam. Our sample includes 366 establishments that were originally business households. Of which, 184 business households switched to enterprises (switchers), and 182 remained as business households (non-switchers). Using propensity score matching, we discovered several exciting findings. First, switching to enterprises has a positive impact on the financial performance of the switchers. Second, applying different matching algorithms, we found that business households that switched to enterprises have higher financial performance than those which did not, with an average increase in ROA from 0.134 to 0.164. Finally, our research findings suggest that provincial leaders and the Vietnamese government should encourage business households to switch to enterprises. In particular, leaders should focus on training programs, loan support, and strengthening support services from the government.

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Fig. 1

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  • 15 August 2022

    Incorrect footnote 5.

Notes

  1. Clause 1, Article 66 of Decree 78/2015/ND-CP dated September 14, 2015, of the Vietnamese Government on Enterprise Registration. At the time of the survey, the activities of business households and enterprises were regulated by this Decree.

  2. Clause 10, Article 4 of Law 59/2020/QH14 dated June 17, 2020, of Vietnam’s National Assembly promulgating the Law on Enterprises.

  3. More details are presented in Appendix 1.

  4. To improve the quality of matching as well as the robustness check, following Dehejia and Wahba (2002) and Moahid et al. (2021), we use a caliper with radius matching (0.05).

  5. According to the list of business households and business households that switched to enterprises (which maintain operations and have tax declarations continuously within three years) provided by the local governments, the total number of business households and business households that switched to enterprises is 4,029. Using the Slovin (1960) formula with an error of 0.05, the minimum sample size would be 363.

  6. The estimated treatment effects of switching on the switchers’ revenue are presented in Appendix 2. However, using the revenue to reflect the financial performance can be biased in certain cases due to the scale effects. Therefore, this revenue-based result is for reference only

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Correspondence to Nguyen Khanh Doanh.

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Appendix

Appendix

Appendix1. Comparison of payable tax costs and administrative procedures between business households and enterprises.

STT Contents Business households Enterprises
1 Number of main taxes Three main types of taxes
1. License tax;
2. Value added tax;
3. Personal income tax
Four main types of taxes
1. License tax;
2. Value added tax;
3. Personal income tax
4. Corporate income tax
2 License tax rate (tax fee) There are three tax rates:
− 300,000 VND/year (applicable in the case the revenue is in the following range: 100 million VND/year < revenue ≤ 300 million VND/year)
− 500,000 VND/year (applicable in the case the revenue is in the following range: 300 million VND/year < revenue ≤ 500 million VND/year)
− 1,000,000 VND/year (applicable in the case revenue is greater than 500 million VND/year)
There are three tax rates:
− 1,000,000 VND/year (applicable for branches, representative offices, business locations, non-business units, and other economic organizations)
− 2,000,000 VND/year (Applicable for enterprises with charter capital or investment capital of 10 billion VND or less)
− 3,000,000 VND/year (Applicable for enterprises with charter capital or investment capital over 10 billion VND)
3 Method of calculating value-added tax One method:
- Direct method
Two methods:
- Deduction method
- Direct method
4 Tax declaration, finalization and management Simple, fewer procedures.
Business households can follow the form of presumptive tax.
There are many forms, and reports must be made on a monthly, quarterly, and yearly basis. The implementation of tax finalization according to regulations.
5 Financial management Simple, difficult to accurately determine loss and profit. There must be detailed revenue and expense reports as prescribed, ensuring data accuracy and supporting documents.

Appendix 2. Estimated treatment effects of switching on the switchers’ revenues

Sample Treated Controls Difference Std. Err T- stat
NN1
Unmatched 0.800 0.299 0.500 0.057 8.71
Matched 0.800 0.287 0.512 0.087 5.87
NN5
Unmatched 0.800 0.299 0.500 0.057 8.71
Matched 0.800 0.347 0.453 0.068 6.67
Kernel
Unmatched 0.800 0.299 0.500 0.057 8.71
Matched 0.777 0.339 0.439 0.063 6.99
Caliper
Unmatched 0.800 0.299 0.500 0.057 8.71
Matched 0.769 0.340 0.429 0.063 6.84

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Hieu, L., Hong Van, V. & Doanh, N. Impacts of switching from business households to enterprises on the financial performance. Port Econ J (2022). https://doi.org/10.1007/s10258-022-00219-w

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  • DOI: https://doi.org/10.1007/s10258-022-00219-w

Keywords

  • Business households
  • Switching
  • Enterprises
  • Propensity score matching
  • Thanh Hoa
  • Vietnam

JEL

  • D14