This paper examines the role of informal and formal institutions behind the remarkable growth in the private sector in the Vietnamese economy since the start of the economic transition in the late 1980s. It shows that firms in Vietnam have increasingly taken on risks in their transactions, in spite of weak or non-existent formal institutions. Risk taking by firms can be explained by the use of informal institutions such as relational contracts and networks along with the recourse to emerging formal institutions such as written contracts. The results suggest that formal and informal institutions can act as complements during the process of transition, and that informal institutions may remain important as mechanisms of risk management even as the economy matures and new formal institutions gradually developed.
IPPG Discussion Paper Series Number Nineteen, DFID, London, UK, 25 pp.