Relationship-specific investments for up- and downstream firms and credit constraints

Thomas David, Michael Troege, Hiep Manh Nguyen and Hang Thu Nguyen

Journal of Corporate Finance, 2024, vol. 84, issue C

Abstract: This paper argues that there exists a fundamental asymmetry between relationship-specific investments (RSI) made for downstream firms (customer-specific investments – CSI) and for upstream firms (supplier-specific investments – SSI). Both types of RSI can create a hold-up problem, but everything else equal, suppliers have higher bargaining power, rendering hold-ups by suppliers more dangerous than hold-ups by customers. Using unique data on Vietnamese SMEs that allow for a clean separation between CSI and SSI, we demonstrate that this leads to less frequent SSI and that the few firms making SSI will be more risky and financially constrained. We discuss the implications of this finding for supply chain management and public policy destined to foster RSI.

Keywords: Supplier-specific investments; Credit constraints; Bargaining theory; Vietnam; SMEs (search for similar items in EconPapers)
JEL-codes: C78 G20 G21 G32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:84:y:2024:i:c:s0929119923001839

DOI: 10.1016/j.jcorpfin.2023.102534

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