How Embedded Ties Transfer Benefits Through Networks: Banking Relationships and the Firm's Strategic Use of Trade Credit Financing

Brian Uzzi and James J. Gillespie

IPR working papers from Institute for Policy Resarch at Northwestern University

Abstract: The mechanisms by which social ties and networks help actors transcend the limitations of their internal capabilities is a key component of a theory of social organization. One key mechanism concerns how the competencies and resources of one actor in a network are transferred to another actor who uses them to enhance transactions with a third actor. Building on a social embeddedness approach, we argue that actors linked through embedded ties gain unique access and governance benefits that promote the flow of resources and competencies that invalue their separate third-party relationships. We examined these arguments in the context of small firm financing networks, with an eye to how the embeddedness of a firm's commercial banking transactions in social attachments facilitates its acquisition of competencies and resources that promote its strategic use of trade credit financing. We relied upon theory and original fieldwork to develop our arguments and then used quantitative methods and a separate large-scale data set to examine the representativeness of our hypotheses. We found that embedded bank-firm relationships provided three key vital resources to firms: financial expertise, supplier referrals, and term credit. These factors increased the amount of early payment discounts and decreased the amount of late payment penalties on trade credit taken by the firm.

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