Empowering Economic Growth: Government Loans for Supply Chains in Emerging Markets

Jing Hou and Fasheng Xu

Foundations and Trends(R) in Technology, Information and Operations Management, 2024, vol. 18, issue 1, 116-136

Abstract: MSMEs (Micro, Small and Medium Enterprises) play a crucial role in emerging markets, despite facing various challenges that impede their growth and success. One primary challenge is the limited access to affordable financing programs. A typical policy intervention is providing affordable government loans to these MSMEs. Motivated by the Indian example, we develop a game-theoretic model to investigate the interaction between the cash-constrained manufacturer and retailer in the context of interest-free government loans. Our research yields the following main insights. First, the value of trade credit can demonstrate both complementary and substitutional relationships with the government loan budget, contingent on the level of the government loan budget. Second, while the government loan consistently enhances the manufacturer’s profit, it may adversely impact the retailer. Finally, in the design of a loan policy, it may be more beneficial for social welfare if the government retains some of the loan budget rather than lending the entire available amount to the supply chain.

Date: 2024
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