This study examines how political connections affect the performance of small and medium enterprises (SMEs) in Vietnam. Using a panel fixed effects approach, data was collected biennially from 2005 to 2015, focusing on Vietnamese SMEs in collaboration with the Central Institute for Economic Management (CIEM), the Development Economics Research Group (DERG), and the Institute of Labor Science and Social Affairs (ILSSA), at the University of Copenhagen. The results show that political connections have a significant negative impact on SME performance. While these connections provide benefits such as easier access to bank loans, tax breaks, and smoother regulatory processes, they also require firms to incur higher informal payments and labor costs, making inefficient resource allocation. Furthermore, the impact of political ties is more pronounced in regions with weaker institutional frameworks.
