Trade credit: theory and evidence for emerging economies and developing countries

Robert Cull, Chorching Goh and L. Colin Xu

Chapter 3 in Research Handbook on Alternative Finance, 2024, pp 49-69 from Edward Elgar Publishing

Abstract: Trade credit remains an important source of finance for firms in developing countries and many firms in developed countries, especially those that are young, small, or informationally opaque for other reasons. We explain the pervasiveness of trade credit, detailing its advantages over formal credit in terms of the information that buyers and sellers have about each other and their ability to monitor one another. Because it requires less formal contract enforcement, trade credit can be relevant where the rule of law and the legal system are weak. Meanwhile, reliance on information from social networks and informal institutional arrangements limits the scale of trade credit, and thus moderate improvements to formal enforcement can expand trade credit beyond social networks and enable customers to switch suppliers. The patterns suggest a “Goldilocks” region where mid-size firms and those in countries at middling levels of development rely more heavily on trade credit than others.

Keywords: Asian Studies; Business and Management; Economics and Finance; Innovations and Technology (search for similar items in EconPapers)
Date: 2024
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