Trade credit and comparative advantage: evidence from global manufacturing sectors

Thomas Michael Rowley and Zhiting Shen

Review of Accounting and Finance, 2025, vol. 25, issue 1, 22-51

Abstract: PurposeThis paper aims to examine how industry-level comparative advantage shapes firms’ use of trade credit, highlighting differences between emerging and advanced economy firms. It addresses a gap in the literature by analyzing how country-industry heterogeneity influences inter-firm financing beyond macroeconomic and firm-level determinants.Design/methodology/approachUsing firm-level data from 9,673 manufacturing firms across 33 economies, the study applies dynamic generalized method of moments estimation to address the potential endogeneity of macroeconomic and firm-level controls as well as an empirically estimated measure of revealed comparative advantage. A difference-in-differences (DiD) analysis of a trade shock on China’s photovoltaic industry further explores trade credit’s role in financial stability.FindingsFindings reveal that firms in industries with comparative advantage extend less trade credit, particularly in emerging economies, as they rely less on extending credit to attract business. Controlling for this country–industry heterogeneity proves essential for accurately interpreting macroeconomic determinants of trade credit. The trade shock analysis shows that affected firms increased their use of accounts payable rather than accounts receivable, reinforcing the role of supplier-customer relationships in mitigating financial constraints.Originality/valueThis paper is the first to systematically assess the impact of industry comparative advantage on trade credit strategies. It introduces a novel application of the IMF's Financial Development Index in trade credit research, demonstrating its significance when country–industry heterogeneity is considered. By leveraging a natural experiment, it provides fresh insights into how firms adjust financing strategies in response to international trade shocks.

Keywords: Trade credit; Industry competitiveness; Comparative advantage; Emerging economies; Manufacturing sector; Trade shock; GMM (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:rafpps:raf-04-2024-0158

DOI: 10.1108/RAF-04-2024-0158

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