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Financial Aspects of Transactions with FDI: Trade Credit Provision by SMEs in China

Author

Listed:
  • Ito, Seiro
  • Watanabe, Mariko
  • Yanagawa, Noriyuki

Abstract

This paper will document financial aspects of transactions, and trade credit supply behavior with FDI among small and medium-sized enterprises(SMEs) based on two original surveys, conducted in four cities in China in 2003. The survey was designed to capture the nature of inter-firm transactions, trade credit and other financial conditions. Literature on FDI mainly refers to technology transfer, employment or investment. This paper focuses on the role and significance of FDI in the supply of trade credit due to its trade credit enforcement technology.Yanagawa, Ito and Watanabe [2006] developed a model which indicates that when a seller has higher enforcement technology or a buyer has richer liquidity, both trade credit and transaction volume will be increased. In this paper, we confirmed that FDI and G contributed to the provision of trade credit and had a positive external effect on trade credit enforcement towards China’s economy. (1) Sales towards FDI customers have the power to increase the trade credit ratio,even when controlling other factors such as choice of payment instrument, competitiveness, and expost default management. This implies that FDI does provide trade credit, not only because it has superior liquidity, but because it is also superior in terms of enforcement of trade credit repayment.(2) Cash constraints of the buyer influence the decisions concerning trade credit provided by the seller, as a model in Yanagawa, et al. [2006] predicted, and this implies that strategic default is a serious concern among SMEs in China. (3) Spillover effect exists in payment enforcement technology in transactions with FDI customers.

Suggested Citation

  • Ito, Seiro & Watanabe, Mariko & Yanagawa, Noriyuki, 2007. "Financial Aspects of Transactions with FDI: Trade Credit Provision by SMEs in China," IDE Discussion Papers 99, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    • Handle: RePEc:jet:dpaper:dpaper99
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    File URL: https://ir.ide.go.jp/record/38068/files/IDP000099_001.pdf
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    References listed on IDEAS

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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • K0 - Law and Economics - - General
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions

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