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Institutional Constraints and Private Sector Development: The Textile and Garment Industry in Vietnam

The argument for the privatization of state enterprises is based on the superior efficiency of private over state ownership. This argument is only true when it ignores the institutional constraints including insecure property rights enforcement, land, credit, and export-quota policies. By using a survey of ninety-six textile-garment enterprises in Vietnam, private and foreign enterprises were found to face serious institutional constraints. These constraints explain why private and foreign enterprises have inferior profitability indicators compared with state enterprises; and why total factor productivity of private enterprises is low compared with state enterprises. Without removing these institutional constraints, the privatization of state enterprises may not bring about greater operational efficiency.