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Trade Credit as a Competitiveness Tool;Evidence from Developing Countries

  • Van Horen, Neeltje

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: https://mpra.ub.uni-muenchen.de/2792/1/MPRA_paper_2792.pdf
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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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  1. John McMillan & Christopher Woodruff, 1998. "Interfirm Relationships and Informal Credit in Vietnam," William Davidson Institute Working Papers Series 132, William Davidson Institute at the University of Michigan.
  2. Benjamin S. Wilner, 2000. "The Exploitation of Relationships in Financial Distress: The Case of Trade Credit," Journal of Finance, American Finance Association, vol. 55(1), pages 153-178, 02.
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