Social security and firm performance: The case of Vietnamese SMEs

The relationship between job quality and firm performance has been much debated with mixed evidence, and the evidence is particularly limited in the case of small and medium enterprises (SMEs) in emerging economies. This paper investigates how social security provision as a key determining factor of formality impacts on firm performance in Vietnam. Based on enterprise census data covering all registered firms across the 63 Provinces of Vietnam from 2006 to 2011, we find that, controlling for unobserved time-invariant firm-level characteristics, firms which increase the social security coverage by 10 per cent, experience a per worker revenue gain of between 1.1–2.6 per cent and a profit gain of around 1.3–3.0 per cent, with exact estimates depending on the survival time of the firm. However, there is time-inconsistency between costs (social security contributions) and benefits (firm performance) in that the benefits may not realize in the immediate term. Thus, specific policy measures such as subsidising social insurance contributions for small firms during an initial period until the business becomes viable could potentially encourage active participation in mandatory schemes. A series of robustness check are undertaken which show that the results hold in general.