This paper aims to examine the role of political connections on the performance of small and medium enterprises (SMEs) in Vietnam. Following the scope of the study, the panel fixed effect has been adopted to explore the impact of political connections on a firm’s performance. The data was collected every two years from 2005 to 2015 from Small and Medium Enterprises surveys in Vietnam under the collaboration of the Central Institute for Economic Management (CIEM), the Institute of Labor Science and Social Affairs (ILSSA), and the Development Economics Research Group (DERG) of the University of Copenhagen (Denmark). The results show that political connections have a significantly negative effect on the performance of SMEs. In contrast, political ties can facilitate firms to obtain benefits such as bank loans, taxation, and time dealing with regulations. However, to gain benefits from political connections, connected SMEs also have to pay higher informal fees and higher labor costs, leading to inefficient resource allocation. Furthermore, political ties are more important to SMEs in regions where the institutional mechanism is less developed.
