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

Abstract 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.