Social capital and firm performance in transition economies

The study explores how social capital affects the performance of small- and medium-sized enterprises (SMEs) in a transition economy. Social capital is referred to as firm’s social interactions with formal and informal creditors, which is financial social capital, and social interactions with politicians and civil servants, which is political social capital. Using a control function estimation method with longitudinal data from repeated surveys of small- and medium-sized enterprises (SMEs) in Vietnam, we find an inverted U-shaped relationship between social capital and SMEs’ performance, which is measured by gross profit and labor productivity. We further show that there is a positive complementary effect between innovation and social capital in affecting performance of SMEs.