LAUSR

Abstract Previous studies have not investigated whether firms can use internal control (IC) systems as a means to promote firm profitability. Applying an instrumental variable approach to the data on small and medium-sized enterprises (SMEs) in the Vietnamese manufacturing industry, this paper discovered that implementing ICs does improve firm profitability. This result is driven by several mechanisms. First, the use of ICs decreases bribery. Second, although ICs do not enable access to credit, they advance the formalization process and help firms gain government support. This suggests that in the context of ineffective institutions, firms can improve their financial performance by applying the appropriate IC systems.