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Trade Credit as a Competitiveness Tool;Evidence from Developing Countries

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Author Info
Van Horen, Neeltje

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Abstract

Statistics show that the sale of goods on credit is widespread among firms even when they are financially constrained and thus face relatively high costs in providing trade credit. A possible explanation for this is the use of trade credit as a competitiveness tool. By analyzing both the impact of customer as well as producer market power on a firm’s decision to provide trade credit, we examine whether trade credit is indeed used as a way to lock in customers by firms in developing countries. Using a new dataset containing a large number of firms in 42 developing countries, we find strong evidence that an important driving force behind the decision to provide trade credit is the urge to be competitive. This especially holds for those firms that still have to establish a solid market reputation and for firms located in countries with an underdeveloped banking sector.

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File URL: http://mpra.ub.uni-muenchen.de/2792/
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2792.

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Date of creation: Jun 2004
Date of revision: Mar 2005
Handle: RePEc:pra:mprapa:2792

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Find related papers by JEL classification:
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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  3. Ferris, J Stephen, 1981. "A Transactions Theory of Trade Credit Use," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 243-70, May. [Downloadable!] (restricted)
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  5. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June. [Downloadable!] (restricted)
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  6. Chee K. Ng & Janet Kiholm Smith & Richard L. Smith, 1999. "Evidence on the Determinants of Credit Terms Used in Interfirm Trade," Journal of Finance, American Finance Association, vol. 54(3), pages 1109-1129, 06. [Downloadable!] (restricted)
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  8. Beck, Thorsten & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2002. "Financial and legal constraints to firm growth - Does size matter?," Policy Research Working Paper Series 2784, The World Bank. [Downloadable!]
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  12. Smith, Janet Kiholm, 1987. " Trade Credit and Informational Asymmetry," Journal of Finance, American Finance Association, vol. 42(4), pages 863-72, September. [Downloadable!] (restricted)
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  17. Michael S. Long & Ileen B. Malitz & S. Abraham Ravid, 1993. "Trade Credit, Quality Guarantees, and Product," Financial Management, Financial Management Association, vol. 22(4), Winter.
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  1. Klapper, Leora, 2005. "The role of factoring for financing small and medium enterprises," Policy Research Working Paper Series 3593, The World Bank. [Downloadable!]
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