Capital market distortions and skills demand in a transitional economy: The case of Vietnam

We model and investigate differences in factor demand by private and state-owned enterprises in Vietnam, an economy in transition, to market-driven growth. We postulate that state firms, who have privileged access to financial capital and face lower borrowing costs, choose technologies that are capital intensive and demand more skilled labour, a complementary input, while private firms rely on low-technology methods and less-skilled labour. Propositions generated by the model are supported by analysis using data from Vietnam's enterprise census. Because the private sector is by far the larger employer, a more level capital market playing field would likely raise aggregate demand for skills, thereby strengthening incentives to invest in higher education.