A Categorical Data Analysis on Financial Failures in Vietnam, 2007-2013

10 September 2013 | In this paper, Vuong et.al. (2013) examine 256 cases of financial failure and fraud occuring during the recent Vietnam’s chaotic years from 2007 to 2013, employing methods of categorical data analysis. Reported results suggest that the rent-seeking approach, or resource-based orientation, alone does not help explain the outcome of a business intention while the association between Orientation and Approach is the best-fit predictor. Rampant financial collapse not only increases the cost of funds but also erodes trust in the economy. Entrepreneurship development and creativity capacity building are necessary to improve socio-economic conditions and the environment. This work also introduces intuitive and cognitive factors to predict ex-ante outcome of a financing scheme.

Prior to 2007, the incidents of financial collapse were small in scale, simple business models, and almost solely within the informal economic sector. For instance, ‘Hui’ – an informal and primitive form of banking operation – was typical and popular since late 1980s to 2000s. Individual members of a ‘Hui’ group commit to contribute a fix amount of money every term, often one week or one month. Each term, one member takes the sum of the contributed money to use in his or her business. Such rotation allows every individual to get his/her accumulated saving at once, instead of waiting for weeks and months. ‘Hui’ was interesting because it began as an innocent credit group or cooperatives but most ended as a fraud, not a business failure. When a ‘Hui’ group expanded, one member would be promoted to chair. The rotation kept continuing but the member, who is able to take the sum, would sell his/her right to the chair, very often, with a premium. The chair then would invested the sum him/herself or lend the money to other. In other words, the chair ran a banking business. If debtors were not able to repay, then the chair was in trouble. He/she tried to cover such failure by creating a sort of Ponzi scheme.

Ultimately, some groups went from a loss of millions to tens of millions of U.S. dollar. Even so, the longevity of some ‘Hui’ groups was significant: a 40-member ‘Hui’ group in Ho Chi Minh City reportedly lasted for 26 years,from 1980 to 2006.

The notion of stock markets, of course, was quite new for the Vietnamese economy as it moved away from a planned focus. With little direct involvement or knowledge of how a stock market operated, then, many Vietnamese assumed that whatever they invested would go “up” in value, and as a result, they did not conceive or understand the concept of downside risk. The surge of the Vietnamese stock markets in 2006-2007 reflected that expectation and, as the economy boomed, people became overly confident of a bright future of the transition economy. They had reason to believe in such a positive trend as the Vietnam-Index increased by more than 200% from March 2006 to March 2007, reaching its peak of 1,171 on March 12, 2007. Watching such a trend led many in Vietnam to believe that the exchange was a ‘money machine.’

But soon, the public noticed that financial frauds were increasingly reported by the local media. The frauds also became larger, more complicated, and more often were related to formal credit system. For example, in some banks, the staff produced fake documents and cheated surveillance systems to embezzle their bank’s money while convincing themselves that handsome profits would bring them large gains shortly and that they would safely return their “borrowed funds” to the bank. Others individuals advertised themselves as having important and strong relationships that allowed for purchasing stocks at prices far below market prices. Members of the public sometimes bought the privileges of being able to purchase stocks, and often did buy stock, but alas, never received it. Such examples of fraud began and grew in earnest as the turmoil escalated.

The period 2007-2013 is critical for Vietnam. Right after the stock market reached its peak, the emerging economy entered a turbulent period. Stock prices tumbled; the VN-Index plummeted to 287 in December 2008. Inflation roared to 23% in 2008. Monetary policy tightened the market rate for credit to as much as 25%. In addition to financial fraud, bankruptcies and business closures were prominent in the news. From early 2011 to the end of 2012, over 100,000 (mostly private) enterprises declared insolvency or quietly closed operations, accounting for between 15-25% of the enterprise population (Vuong and Napier, 2013).

Well-established incorporations, in both state and private sectors, were also facing severe problems, often financial collapse. Losses increased to tens and hundreds of millions, even billions of U.S. dollars. For example, Vietnam’s major coffee exporter, Thai Hoa Co., was technically bankrupt with a debt of about $60 million, while the state-owned shipbuilder Vinashin reportedly possessed a debt burden of approximately $4 billion.

Even financial tycoons, like Nguyen Duc Kien and Huynh Thi Huyen Nhu, were accused of financial wrongdoings that resulted in their creditors’ losses of $370 million and $250 million, respectively, and the cases are under investigation. Increasing number of bankers and financiers has been arrested in recent years, also suggests more complicated financial frauds.

Many people are interested in predicting financial collapse, both failures and fraud, and face challenges of availability of data, professional knowledge, and the most important, the performance of an existing financing scheme (e.g., Zmijewski, 1984; Singleton & Singleton, 2007; Moyer, 1977; Ohlson, 1980). This investigation suggests intuitive and cognitive indications – considering the association of orientation and approach – that could help predict ex-ante outcome.

The interdependence of orientation and approach of a business’s intention explains increasing numbers of financial collapses in economic turmoil. The existence of innovation does not ensure a successful business but improves creditors/investors’ confidence in the entrepreneurial endeavors of fundraisers. Indeed, a neglect of creative performance and reliance on capital and physical resources may lead a business to acute problems caused by the law of diminishing returns (Vuong & Napier, 2013).

Moreover, lack of innovation, such as the introduction of new products and employment of new technology, prevents business from approaching funding opportunities. In a relationship-based economy, like Vietnam, an entrepreneur has to stand out of the crowd if he wants to attract the society’s attention (Vuong & Tran, 2009).

In addition, it is noteworthy that although traditions of managements often view a business organization as a machine of “information processing”, Einstein remins us “information is not knowledge.” Therefore, while lots of Vietnamese amateur and professional business people are scrambling for privileded or inside information – considered as a type of rent seeking – they trap themselves. Nonaka (1991) affirms that the most single lasting competitive advantage is knowledge, especially “in an economy where the only certainty is uncertainty.” In light of this, if a business wants to survive and pursue success then its “sole business” must be “continuous innovation”.

The complication of modern economies and the revolution of information technology sometimes confuses people who see innovative traits that may (or may not) be in reality financial frauds. Several confusing examples have appeared in the last few years. When the producer of Thanh Huong Perfume Co. raised funds from relatives, friends, and business-partners in late 1980s, most Vietnamese were unfamiliar with the product. Thus, many believed that the producer possessed some extraordinary technology or knowhow that could generate handsome profits. In 2008, Sacombank’s Real Estate Company (Sacomreal) introduced a truly innovative inancial product to the infant corporate bond market of Vietnam when it issued corporate bonds that provide bondholders with right to purchase properties developed by the company (Vuong & Tran 2011). Commercially, that innovative product sold really well, as the instrument met the market need. Naturally, the bond offerings contributed to make Sacomreal one of the most prominent property developers, whose shares have been listed on Ho Chi Minh Stock Exchange. And just recently several IT firms introduced e-commerce to new computer users in their attempts at persuading them to invest in their online-store websites. The perfume producer, the real estate bond market financier, and the IT developers did believe that they were creating some true value.

But they hyped their stories – from the capacity for perfume production, to the market demand for apartments and offices, to the selling power of fancy online stores. Then, when each of these fundraisers faced problems, they in essence tried to set up Ponzi schemes to maintain their performance and ultimately their business failures turned out to be financial frauds. Here, Pressman (1998) is right, again.

The investors were so confident of their assessment of market prospects, the property bubble, and the ecommerce trend that they did not expect or see more deeply into the possibility of fraud. Psychology and the resulting decisions–by greed and scarce business opportunities–may also induce creditors/investors to put their money in risky nests. It is not because of asymmetric information but because of the lack of cost-benefit consideration and careful multi-layer filtering of information (e.g., Vuong & Napier, 2012) that investors fall prey to the dangers lurking in conditions of turmoil. Despite an appreciation of the credit crunch and economic stagflation, many investors still scramble to withdraw their savings, gather cash from family members and friends, and even to mortgage their houses to lend money and then hope for pretty profits. They innocently ignore the fact that they lent money at sky-high interest rates and that none was able to repay a loan at such rate plus a premium of the usury lenders.

Financial cheaters, on the other hand, well understand the critical effect of psychology. All of their resources, including creativity capability, are employed to build and leverage their close relations to high-ranking bureaucrats, luxury manage their reputations and impressions, and convey the image of successful businesspeople. In reality, some appear to be seeking personal, and perhaps fraudulent, gain.

Last but not least, considering the association of orientation and approach provides potential method of early prediction of the outcomes of a financing scheme. Likewise, it appears that over-tapping available resources and strictly seeking profits to the detriment of investing within the firm in more innovative directions may likely result in collapse. An economic setting of an easing monetary policy and worsening business prospect – for instance, lowering interest rate in association with increasing unemployment – is comfortable environment for financial frauds blossom. In light of this, the economy has to pay for increasing cost of funds, and more important, society’s trust is being eroded. Fortunately, entrepreneurship development – to shift business orientation to economic prospect – and innovation capacity building – to shift business approach to creativity – are possible to pave a pathway out of deadlock situation of this kind.

* Vuong, Q.H., Napier, N.K., Tran, T.D., and Nguyen, T.H.K (2013). A categorical data analysis on financial failures in Vietnam, 2007-2013. International Journal of Business and Management, 8 (18).

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