Household Entrepreneurship and Social Networks: Panel Data Evidence from Vietnam

Abstract

Using a unique panel of household businesses for Vietnam, this paper sheds light on the links between households' and entrepreneurs' social networks and business performance. We address two related questions. One first question asks if we can find evidence of a differentiated effect of employment of members of the family versus hired workers on the business performance. A second question tackles the respective effects of various dimensions of social networks on the business technical efficiency. The assumption is that, beyond the channel of labour productivity, entrepreneurs that are confronted with an unfavourable social environment may produce less efficiently and realize a lower output than what could be possible with the same amount of resources. We find evidence of a productivity differential between family and hired labour and highlight results consistent with the presence of adverse social network effects faced by households running a business, in particular ethnic minorities. We stress the importance of professional networks for successful entrepreneurship.

Do family and kinship networks support entrepreneurs?

“…The effects of family and kinship networks on entrepreneurs also differ for businesses in the formal and informal economies [7]. These networks may be more critical in the informal economy, where it substitutes for scarce formal support mechanisms in access to and management of factor inputs, such as physical and human capital and productive infrastructure.…”

“…In developing countries, women and children constitute a larger proportion of family labor than of hired labor. If the marginal productivity of women and children is lower than that of men, then that difference in the composition of labor would drive down the marginal product of family labor relative to hired labor [7]. The skill differential between family labor and hired labor might also be an important source of differences in the productivity of workers.…”

“…In urban West Africa, local family and kinship ties have been shown to enhance the informal entrepreneur's labor effort and use of physical capital [9]. A study in Vietnam that investigated the impact of social and family networks on the efficiency of informal household businesses found that close ethnic ties tend to have positive effects, perhaps thanks to mutual support from the local community and knowledge spillovers [7].…”

“…In Vietnam, for example, studies show how traders in the older quarters of Hanoi have managed to remain in place despite the adverse effects of multiple upheavals (the war, the communist period, trade liberalization) because strong social networks of family and friends helped traders establish and expand their businesses. Other studies shed light on the dynamics of craft villages in the suburbs of Hanoi, which are organized in clusters specializing in one activity based on guarantees of ongoing, long-term relationships [7]. Family and kinship networks may also promote innovation by enabling better-connected entrepreneurs, who have better and more creative ideas, to react more agilely to new market circumstances.…”

“…They generally do so because of the lack of labor market intermediaries that can channel information about jobs, but also because they consider family labor to be more reliable and to offer flexibility that is difficult to find on the labor market [7]. In addition, entrepreneurs may use family labor because the extended family expects to be given jobs in small or household firms, either because egalitarian norms demand it or because the extended family helped set up the business and wants to be rewarded for that effort once the company is running [7].…”