interfirm relationships_ informal credit_vietnam

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INTERFIRM RELATIONSHIPS AND INFORMAL CREDIT

IN VIETNAM*

JO H N MC MILLAN AND C H RI STO PH E R WO O DRU FF

Trading relat ions in V ietna ms emerging private sector a re sha ped by tw o

market frictions: the difficulty of locating trading partners and the absence of legal

e n fo r ce m en t o f c on t r a c t s . E x a m i n i n g r e l a t i o n a l c on t r a c t i n g , w e fi n d t h a t a fi r m

trusts its customer enough to offer credit w hen the customer fin ds it ha rd to locat e

an alterna t ive supplier. Alonger dura t ion of trading r elat ionship is associat ed with

l a r g e r c r e d i t , a s i s p r i o r i n f o r m a t i o n g a t h e r i n g . C u s t o m e r s i d e n t i fi e d t h r o u g h

b u s in e ss n e t w o r ks r e ce iv e m o r e c r ed i t . Th e s e n e t w o r k e ff ec t s a r e e n d ur i n g ,

suggest ing that networks ar e used to sanction default ing customers.

I . I NTRODUCTION

Firms routinely rely on other fi rms goodwill. Where a well-

functioning legal system exists, in advanced economies, ongoing

relationships complement formal contracts in helping deals work

smoothly [Macaulay 1963; Haley 1997]. Where laws of contract

a r e in a d e q u a t e , in m a n y d e ve lop in g a n d t r a n sit ion cou n t r ies,

informal relat ionships can substitute for the courts in allowing

d e a ls t o be m a d e [Gr e if 1997; McMilla n 1997]. O n g oin g or

clientelistic relationships have long been studied by sociologists,

an thropologists, an d economic h istorian s.1 They have been little

studied econometrically, however, because da ta are har d to comeb y a n d b eca u s e t h e d ep en d en t v a r i a b le , t h e s u cces s of t h e

relationship, can be ha rd t o measure.

A survey of private fi rms in Vietnam is used in this pa per t o

examine relational contra cting. The survey gives da ta on a fi rms

relat ionships w ith specific customers a nd suppliers. Ta king a s our

* We t h a n k J ul i a n B e t t s , S t e p h a n H a g g a r d , E d w a r d L a z e a r , G a r e y R a m e y,J a m e s R a u c h , J o el S o be l, L a r s S t o l e, F r a n k U p h a m , D i m i t r i Va y a n o s , J o el

Watson, Andrei Shleifer, and three referees for comments; and Nguyen Vo Hung,Nguyen Than h Ha , Steven Kullback, Liem Le, Trac P ham, a nd Tama ra Richard-son for running t he surveys. The dat a collect ion w as supported by the V ietna m-P a c i fi c P r o g r a m a n d t h e A c a d e m i c S e n a t e o f t h e U n i v e r s i t y o f C a l i f o r n i a , S a nD i e g o, t h e p r o je ct o n I n s t i t u t i on a l R e fo r m a n d t h e I n f o r m a l S e ct o r, a n d t h eWilliam D avidson C enter. The da ta ar e ava ilable at htt p://WWW-IRP S.U CS D.E DU /fa culty /cwoodr uff.

1. G eertz [1978]defi nes clientelizat ion as the tendency for repetitive purchas-ers of part icular goods and services to establish continuing relat ionships withp a r t i cu l a r p u r v e y or s o f t h e m r a t h e r t h a n s e a r c h w i d el y t h r o u g h t h e m a r k e t a teach occasion of need. Ongoing relat ionships in various set t ings h ave beenstudied by Ba rton [1983], Gr eif [1993, 1994], Milgrom, North, and Weingast[1990], a nd P odolny a nd P ag e [1998].

1999 b y t he Pr e s id ent a nd F e llo ws o f H a r v a r d C o lleg e a nd t he M a s s a c hu s e t t s Ins t i t u t e o f

Technology.

TheQuar ter ly Jour nal of Economics, November 1999

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mea sure of a fi rms tru st in its customer the amount of tra de credit

it grant s, we ask wha t the determinant s of business trust are.

O u r m a in fi n d in g s a r e t h a t t r a d e cr e d it t e n d s t o be o f f e r e d

w h e n (a ) i t is d i f f icu lt f o r t h e cu st o m e r t o fi n d a n a l t e r n a t ive

supplier; (b) the supplier has information about the customers

reliability through either prior investigat ion or experience in

dealing w ith it; a nd (c)t he supplier belongs to a n etw ork of simila r

fi r m s, t h is bu sin e ss n e t w o r k p r ovid in g bot h in f or m a t io n a bo ut

customers reliability a nd a means of sanctioning customers w ho

r en eg e on d ea l s . S oci a l n et w o rk s , b a s e d on f a m i ly t i es , a l s o

support relat ional contra cting, a lthough th e evidence for their

efficacy is weaker than for business networks.

I I . R ELATIONAL C ONTRACTING

Our a im is t o test some hypotheses about relat iona l contra ct-

in g . Wh a t d e t er m in es t h e leve l o f bu sin e ss t r u st ? A su p plier

a g r e ein g t o a cce pt p a y m e n t a f t e r d e liver y of t h e g ood s m u st

somehow ensure tha t its customer abides by th e a greement. In the

absence of a forma l legal syst em to enforce contra cts, repayment

must be enforced informa lly. Informa l enforcement often ta kes the

f or m of r ep ea t e d , on g oi n g r el a t i on s ; t h e s u pp li er t r u s t s t h e

customer because it knows th e customer ha s an incentive to repa y

in order to maintain its relationship with the supplier.

Vi et n a m p rov id es a s t r in g en t t e st of t h e w o rk a b il it y of

r e la t ion a l con t r a ct in g , f o r V ie t n a m e se p r iva t e fi r m s d o n o t y e t

have a formal legal system to fall back on. The development of

formal institutions to support a market economy failed to keep

p a ce w it h t h e g r o w t h of t h e p r iva t e se ct or via t h e e n t r y o f n e w

firms that started with the reforms of the mid-1980s. When our

surveyed ma na gers were a sked whet her the court s could enforce a

cont ra ct wit h a customer, 91 percent s a id they could not. 2

We ta ke as our mea sure of trust t he fraction of the pa yment

ma de aft er delivery of the goods; this is our dependent va ria ble. In

w h a t cir cu m st a n ces d oe s t h e on g oin g n a t u r e o f a r e la t ion sh ip

2. Some legal reforms ha ve been ena cted: const itut ional reform establishedthe protect ion of private property in 1992, a nd legislat ion esta blishing businesscourts wa s pa ssed in 1994 [Gillespie 1993; Ph am Van Thuyet 1996]. B ut by t hetime of our survey, 19951997, the courts evidently were st ill not accessible t ofirms. Vietnams situation is worse than even the former Soviet Unions: in a 1997survey asking the sa me quest ion, 55 percent of Ukrainian fi rms a nd 58 percent ofRussian fi rms said the courts could enforce contra cts [J ohnson, McMillan, andWoodr uff 1999].

Q U A R T E R L Y J O U R N A L O F E C O N O M I C S 1286

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a ssu r e t h e su p plie r t h a t t h e cu st om e r w il l r e pa y a d e bt ? Th e

independent va ria bles, suggested by repea ted-ga me theory, repre-

se n t t h e cu st o m e r s a bi l i t y t o fi n d a l t e r n a t ive t r a d in g p a r t n e r s,

the suppliers gathering of information about the customer, and

network relationships.3

Th e cust om e r s a bi l it y t o bu y f r om a l t e r n a t ive su pp lier s

might a ffect t he level of trust a nd t hereby determine the a mount

of trade credit granted. The customer could be locked into the

relationship, either because it would have high costs of search for

another supplier or it would incur large transport costs in buying

from an other supplier. I f the customer is locked in, the supplier

can t hrea ten to cut off furt her tra de if th e debt is not repa id. Firms

t h a t fi n d i t d i f f icu lt t o lo ca t e a l t e r n a t ive t r a d in g p a r t n e r s w il l

invest in m aint aining their exist ing relat ionships [Krant on 1996;

Ra m e y a n d Wa t son 1996]. O n e o f t h e m a n a g er s, f or e xa m p le,

explained he has a trouble-free relat ionship with his customers

beca u se t h e p r od u ct is sp ecia l ize d a n d n ot a va i la ble in t h e

ma rket so both t he enterprise and it s customers hav e to depend on

each other. Lock-in helps make relational contracts workable.

O u r fi r st h y p o t h e sis , t h e n , is t h a t cu sto me rs l a cki n g a l te rn a ti ve

su p p l i e rs w i l l re ce i ve mo re tra d e cre d i t.

F ir m s ch a r a ct er ist ics m ig h t be d i f ficu lt f or ot h e r fi r m s t o

observe; fi rms ha ve different types [Wilson 1985]. A customer

m i gh t or m i gh t n ot b e d e pe nd a b l e i n p a y in g i t s b il ls . Th e

suppliers direct dealings with the customer might yield informa-

tion about its creditworthiness. First , the supplier might visit t he

customers plant or store before any sale is made. One manager

we interviewed said he visits his customers to investigate their

financial capability and personality.Another said the amount of

cr ed it h e a l l ow s d ep en d s on t h e r el ia b i li t y of t h e cu s t om er,

evaluat ed by visit ing his shop. Visits might provide informa tion

a bo u t t h e cu st o m e r s w o r k h a bit s a n d bu sin e ss a cu m e n . T h e y

might also reveal the customers investment in plant and equip-

m e nt : l a r g e s u n k i n v es t m en t s cou l d s e r ve a s a s ig n a l of t h e

customers reliability [Ca rmichael an d MacLeod 1997]. Second,

coop er a t io n m ig h t bu ild u p g r a d u a lly, a s t h e su p plie r lea r n s

through trading about the customers reliability. Some customers

might h a ve long time-horizons w hile others a re fly-by-night fi rms .

B y st e a d ily in cr e a sin g t h e a m o u n t o f t r a d e cr e d it i t o f f e r s, t h e

3 . A n e c d o t a l e v i d e n c e o n h o w t h e fi r m s g a t h e r i n f o r m a t i o n a n d h o w t h e ymaint ain a greements, based on interviews w ith the ma nagers we conducted alongwit h t he surv ey, is given in McMillan an d Woodruff [1999].

I N T E R F I R M R E L A T I ON S H I P S I N V I E T N A M 1287

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su p p lie r ca n in d u ce a n y fi r m s t h a t a r e u n r e lia ble t o br e a k t h e

relationship early a nd th ereby can sort one type of fi rm from the

other [Ghosh a nd Ra y 1996; Wa tson 1995]. The frequency wit h

w h i ch a m a n u f a ct u r er v is it s t h e cu s t om er d u r in g t h e t r a d i n g

relationship ma y indicate the intensity of informa tion gath ering.

Our second hypoth esis, then, is tha t t h e r e w i l l b e m o r e t r a d e c r e d i t

(a ) w h en th e su p p l i er i n sp ects th e cu stomer d i r ectl y a n d (b) i n

relationships of longer duration.

Our third hypothesis is tha t a suppl ier belongin g to a netw or k

w i l l g r a n t m or e t r a d e cr ed i t . Th is cou ld be f o r e it h e r of t w o

distinct , though not mutua lly exclusive, reasons. First , a network

might provide informa tion. A fi rm m ight learn about t he reliabil-

ity of a customer not only through directly dealing with it but also

by a sk in g o t h e r m a n u f a ct u r e r s o r f a m ily m e m be r s be f o r e t h etra ding relat ionship begins. (We sha ll refer t o the fi rst of th ese

in for m a t io n so u r ce s a s a bu sin e ss n e t w or k a n d t h e se con d a s a

social network.) Second, netw orks provide not only informa tion

a bo ut cust om e r s r e lia bili t y bu t a lso e x t r a a bi l it y t o sa n ct ion

customers w ho renege. The threa t of no further t ra de if debts a re

not paid ga ins extra force if it comes not just from the fi rm owed

the money but a lso from other fi rms in the sa me line of business

[Kandori 1992]. Gossip among the firms permits sharing informa-

tion on customers behavior in order to implement such commu-n it y sa n ct ion s. So cia l n e t w o rk s a lso p r ovid e t h e p ossibi l it y of

enacting community sanctions. Community sanctions therefore

give a basis for trade credit.

Th e t w o ve rsion s of t h e t h ir d h y p ot h e sis , in f or m a t ion a n d

sa n ct ion s, ca n be d ist in g u ish e d e m p ir ica l ly. Sin ce a fi r m a lso

learns a bout its customers reliability thr ough its direct dealings

with it , th e init ial informational r ole of netw orks should dissipat e

ove r t im e. I f com m u n it y sa n ct ion s a r e im por t a n t in e lici t in g

coop er a t io n , o n t h e ot h e r h a n d , t h e e ff ect of n e t w o rk s w il l beenduring.4

4. Gr eif [1993, p. 532] uses historical documents to a rgue tha t the eleventh-century Maghribi tr aders netw ork offered sanctioning of traders wh o cheat ed, butits purpose was not to provide information about traders reliability. The cross-country networks of ethnic-Chinese tra ders invest igated by Trindade a nd Ra uch[1997], on the other h an d, appear to perform a n informa tion-provision role but nota s a n c t io n in g r o l e, i n t h a t t h e C h i n e s e n et w o r k s h a v e m o r e i m p a c t o n t r a d e i ndifferentiated products t han in homogeneous products . I nformation ma tters w ithdifferentiated products because of m atching considerat ions, wh ereas if n etworkswere used for sanctioning purposes t heir effect should be th e sa me for homoge-neous and differentiated products.


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I I I . OTHER TH E O R I E S O F TRADE C R E D I T

Although our aim is to test the t heory of relat ional contract-

ing, our regressions will also include some variables suggested by

various theories of trade credit in the finance literature. These

t h e or ies f ocus on d e ve lop ed cou n t r ies w it h f u n ct ion in g leg a lsystems and do not consider relational contracting. Nevertheless,

the determinant s of tra de credit tha t th ey identify might a pply in

Viet n a m . We t a k e t h e se a s su bsid ia r y h y p ot h e ses t o t h e m a in

hypotheses listed above about relat ional contracting. Including

these variables also serves to check the robustness of the main

hypotheses. There are tw o sets of explana tions of why fi rms offer

credit to their customers rat her tha n leaving fi na ncing to special-

ists like banks.

One set of explanations is based on industrial organization. Ifthe ba nking sector is imperfectly competit ive, fi rms ca n use t ra de

credit to a void paying m onopoly rent s to t he ba nks [Emery 1987].

O n t h e o t her h a n d , t r a d e cr ed it m ig ht b e n e ed ed w h en t h e

ba nking sector is too competit ive to allow ongoing relat ionships in

w h i ch t h e b a n k s l os e m o n ey e a r ly i n a r el a t i on s h ip a n d e a r n

profits later [Petersen and Rajan 1995]. The market power of the

fi r m s a lso is r e le va n t : a fi r m m ig h t o f f e r t r a d e cr e d it t o p r ice -

discriminate covertly, to evade legal sanctions, or to hide price

cuts from other customers [Brennan, Maksimovic, and Zechner1988]. Trad e credit ca n furt her serve a s a wa rra nty for product

q u a l it y, s in ce t h e d el a y i n p a y m en t g iv es cu s t om er s t i m e t o

inspect the mercha ndise [Long, Malit z, an d Ra vid 1993].

An o t h e r se t o f e x p la n a t io n s r e st s o n t h e a d va n t a g e s fi r m s

have over banks in selecting, monitoring, and enforcing credit

con t r a ct s . I n f or m a t ion a va i la ble a s a by -p r od u ct of d a y -t o -d a y

t r a d in g m a y a l lo w t h e fi r m s t o se e w h ich cu st o m e r s a r e be t t e r

credit r isks. If the customer ha s no a ccess to bank loans , because

of the a dverse-selection problem, t he seller might have to gra ntcredit in order to make t he sa le. Firms w ill therefore receive more

trade credit when they are receiving less bank credit [Biais and

G oll ie r 1997]. F in a l ly, i f a loa n is n o t r e pa id , a m a n u f a ct u r e r

m i gh t b e b et t e r e q ui pp ed t h a n a b a n k t o r es el l r ep os s es s ed

mercha ndise [Mia n a nd Sm ith 1992].

IV. TH E S U RVE Y

Prior to the mid-1980s, essentially all economic activity inVi et n a m w a s u n d er t a k en b y s t a t e fi r m s or col lect i ve s w h os e


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p r o d u ct io n w a s r e g u la t e d by st a t e p la n s. T h e m a r k e t w a s r e -

placed by central planning after 1954 in the north (Hanoi) and

1975 in the south (Ho Chi Minh City). The transit ion back to a

ma rket economy began in th e early 1980s, and gat hered momen-

tum with a series of reforms undertaken in 1986 (d o i mo i ). The

1986 reforms led to a resurgence of private sector activity. By 1993

privately owned firms outnumbered state firms over three to one

(19,762 to 6,019). They produced, according to official estimates,

29 percent of industria l output na tionwide, concentra ted in light

industry. 5

Our da ta come from surveys of 259 nonsta te fi rms in H a noi in

19951996 and in Ho Chi Minh City in 1997. The surveyed firms

w e r e d r a w n f r o m l ist s o f m e m be r s o f t h e V ie t n a m Ch a m be r o f

Commerce and Industry (VCCI). The sample probably does not

r e p r e se n t t h e V ie t n a m e se m a n u f a ct u r in g se ct o r a s a w h o le , a s

fi r m s t h a t jo in t h e V CCI a r e l ik e ly t o be m o r e su cce ssf u l t h a n

avera ge. The dat a ar e summa rized in Table I . The median fi rm

ha s 32 employees, with t wo fi rms reporting four and t w o report ing

more tha n 300. Our sa mple reflects the recent resurgence of th e

private sector. Most of the fi rms are n ew, w ith 60 percent ha ving

started less than four years before the survey was administered.

B ut 20 percentmostly in H a noibegan opera ting before 1986 a s

col le ct i ve s i n t h e p la n n e d e con om y ; h a l f of t h os e w e r e s t il l

collectives a t t he tim e of the survey.6 All are manufacturers, with

roughly 17 percent producing ga rment s or footw ear, 10 percent in

each of the categories of metal products, wood products, food,

construction ma terials, a nd paper/packaging, a nd the rema inder

from diverse industries. Metal and food-products companies typi-

ca l ly h a v e 50 or f ew e r w or ker s a n d g a r m en t a n d f oot w e a r

com p a n ies m or e t h a n 50. Mo st fi r m s a r e ow n e r -m a n a g ed , w it h

two-thirds being more than half-owned by the top manager and

his family, and 40 percent having no owners outside the family.

Fourteen percent are collectively owned. The primary source of

sta rt-up capita l wa s the entrepreneurs own savings, a lthough 47

percent of firms report some contribution to start-up capital from

n on f a m ily p a r t n e r s a n d 10 p er ce n t r e por t s t a r t -u p lo a n s f r om

ban ks. Ba nk credit is received by 22 percent of the fir ms, but t ra de

5. For ba ckground on Vietna ms reforms, see Fforde a nd de Vylder [1996] an dWorld B a nk [1995].

6. These fi rms are included in the regressions r eported below. How ever, theresults are not cha nged much when either collect ives, firm s older t han ten years ,or both of these groups a re excluded.


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credit is much more common, with 57 percent of ongoing customer

relationships and 53 percent of ongoing supplier relat ionships

involving trade credit.

W h ile a l l t h e r e sp o n d e n t s a r e n o n st a t e fi r m s, s t a t e - o w n e d

enterprises account for some of their sales and supplies, althoughmostnearly three-quarters of sales and two-thirds of supplies

TABL E I

S U MMAR Y OF S U R VE Y D ATA

Category

All

fi r m s

50

Employees

50

Employees

Num ber of fi r m s 259 186 73H a n oi 149 108 41

H o C h i Min h C it y 110 78 32

Number of employees

Media n 32 25 94

Mea n 52 25 122

S t a n da r d devia t ion 60 14 75

Age

14 y ea r s 60% 60% 60%

510 yea r s 20% 19% 23%

10 y ea r s 19% 20% 16%

I ndustries :Met a l 12% 15% 5%

Wood pr oduct s 12% 12% 14%

F ood 10% 11% 7%

G a r m en t s a n d foot w ea r 17% 13% 29%

%of sa les t o pr iva t e fi r m s: 73% 71% 77%

%of sales to customers located:

Wit h in sa m e cit y 56% 63% 40%

Out side cit y, in Viet n a m 23% 24% 23%

E xpor t s 20% 13% 37%

%of supplies fr om pr iva t e fi rm s: 68% 71% 60%

%of supplies from suppliers locat ed:

Wit h in sa m e cit y 54% 58% 44%

Out side cit y, in Viet n a m 32% 30% 38%

E xpor t s 14% 12% 18%

Ownership%of firm s

100%fa m ily-ow n ed 40% 43% 33%

H a ve out side ow n er s 43% 40% 49%

C ollect ively ow n ed 14% 15% 14%

Sta rt-up fi nance%of fi rms

100%fa m ily-fi n a n ced 41% 43% 34%

S om e fi n a n ce fr om pa r t n er s 47% 46% 52%Wit h ba n k loa n a t st a r t -up 10% 9% 14%

%of fi rm s w it h cur r en t ba n k loa n : 22% 17% 37%


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in volve n on st a t e cust om e r s a n d su pp lier s. We con sid er on ly

relationships between the respondent fi rms a nd nonstat e trading

partners. 7

Most sa les go to cust omers in the sam e city a s the respondent.

This is not th e case for large fi rms, h owever, w hich export more

t h a n a t h ir d of t h e ir p r od u ct ion on a ve r a g e . Alt h ou g h e xp or t saccount for 20 percent of production, 73 percent of firms export

nothing. Nine percent (24 firms) export all of their production.

Two-thirds of t he exporters ar e in the wood products, ga rment,

and footwear industries. Firms that export some of their output

are more likely to have started within four years of the survey (82

percent versus 52 percent, t 4.49). Exporters also import a

larger portion of their supplies (24 percent versus 10 percent,

t 3.25), w it h a sm a ll n u m ber (se ve n ) im por t in g a l l of t h e ir

su p p lie s a n d e x p o r t in g a l l o f t h e ir o u t p u t ; t h e se a r e p r o ba bly

subcontractors for foreign fi rms, a lthough the survey provides no

further detail on this.

T h e h e a r t o f t h e su r ve y is a se r ie s o f q u e st io n s a bo u t t h e

firms relat ionships with its first customer and its most recently

added customer; and w ith it longest running supply relat ionship

and its newest supply relat ionship. These questions provide us

w i t h a s a m p le of i n di vi du a l t r a d i n g r e la t i on s h ip s a n d g iv e a

further indication of the level of market development in Vietnam.

The median percentage of a manufacturers total sales going to

each priva te sector cust omer identifi ed in the survey is 30 percent.

Th e g o od s e xch a n g ed a r e n ot u su a lly sp e cifi c t o a bu y er. I n

three-quarters of the relat ionships the manufacturers produce

the same good for other customers; in almost 90 percent of the

cases, manufacturers say their suppliers have other buyers for the

sam e good. Ma nufacturers produce goods to fi ll specific orders in

less tha n ha lf the relat ionships (46 percent of cust omer orders a nd

11 percent of supply orders), with the remainder producing to

ma inta in inventories. These dat a suggest th at most of the tra ding

relat ionships ar e not complex.

For each of the four specific relat ionships, firms were asked

wh a t proportion of the sa les price is paid in a dva nce of delivery, at

the time of delivery, and after delivery. In open-ended interviews

a cco m p a n y in g t h e su r ve y , se ve r a l fi r m s sa id t h a t i t is co m m o n

practice to pay for one order when the next order is delivered.

7. The data indicate th at relat ionships with sta te-owned enterprises have a

different chara cter. Differences between privat e and stat e-owned tra ding part nersare left t o future research.


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O t h e r s sa id a t y p ica l cr e d it t e r m is a m o n t h , w it h n o e x p lici t

interest charged. S ince any buyer offered such a schedule would

find delaying payment to be optimal, we interpret the portion of

th e bill paid a fter delivery as a mea sure of credit supply. Observed

tra de credit is t he outcome of th e supply of credit offered t o the

cust om e r a n d t h e cu st om e r s d e m a n d f or cre d it . We f ocus ons u pp ly, b u t m os t of ou r r es u lt s w o ul d b e u n a ff ect e d i f t h e

equations were interpreted as reduced-form mixtures of supply

and demand factors. Firms receiving bank loans might be given

more credit by suppliers either because th e bank loan is a s igna l of

creditworthiness (a supply factor) or because they ha ve a greater

need for credit (a demand factor). But a customers demand for

cr e d it sh o u ld n o t be a f f e ct e d by t h e a m o u n t o f k n o w le d g e h is

supplier has about him or the availability of alternative suppliers.

Th e s u r ve y con t a i n s i n for m a t i on on 518 m a n u f a c t u re r-customer relat ionships and 518 m an ufacturer-supplier relat ion-

ships. Forty-six percent of the suppliers and 40 percent of the

cu st o m e r s a r e st a t e - o w n e d e n t e r p r ise s. El im in a t in g t h e se a n d

relationships no longer ongoing leaves a sample of 242 customer

relationships and 254 supplier relat ionships. Complete data are

a va ilable for 224 cust omer and 243 supplier relat ionships.8

V. E MPI RI C AL ME ASU RE S

I n t h e n ex t s ect i on w e e xa m i n e t h e d et e rm i n a n t s of t h e

surveyed firms willingness to offer credit to their customers. We

run regressions with the dependent variable being the proportion

of the paym ent ma de aft er delivery of the goods. We use three sets

of independent variables suggested by the theory (as well as a set

of control variables suggested by the trade-credit literature, as

discussed a bove). The m eans of the dependent and independent

va ria bles are shown in Ta ble II .

T h e fi r st se t o f va r ia ble s r e p r e se n t s t h e e a se w it h w h ich a

customer can fi nd a n a lternat ive supplier. The prediction is tha t ,

when a customer can find an alternative supplier more easily, it

will receive less trade credit . We proxy this with two variables.

F ir st , t h e su r vey a sk e d h o w m a n y ot h e r p r od u ce r s o f s im ila r

products were locat ed w ithin one kilometer of t he respondent

fi r m . Alm ost t w o -t h ir d s o f t h e fi r m s in d ica t e d t h e r e w a s a t lea st

8 . Th e r e l a t i on s h i ps d o n o t r e p r es e n t a r a n d o m s a m p le o f a l l t h e fi r m s

t r a d i n g p a r t n e r s . Th e l on g e st r u n n i n g r e l a t i o n sh i ps , i n p a r t i cu l a r , a r e a l m o stcerta inly more successful than average relat ionships.


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TABLE II

C U ST OME R C R E D I TVARIABLE MEANS

All

fi r m s

Domestic

customers

Export

customers

50

Employees

50

Employees

Num ber of obser va t ion s 224 153 71 148 76Avg. %of bill paid aft er

deliver y 38% 39% 37% 35% 44%

%fi rms w /no payment

a ft er 47% 44% 54% 49% 43%

%fi rm s w /a ll pa id a ft er 21% 20% 23% 20% 22%

# similar manufacturers

loca t ed w /in 1 km 3.4 3.3 3.8 3.6 3.1

Most important competitor

w /in 1 km 33% 33% 32% 38% 22%

Dura tion of relat ionship

(y ea r s) 2.13 2.18 2.02 2.1 2.26Visited cust omer before

fi r st t r a n sa ct ion 46% 47% 42% 44% 49%

Currently visit with cus-

t om er a t lea st w eekly 23% 29% 10% 29% 12%

First informat ion from

ot h er m a n ufa ct ur er s 20% 18% 25% 19% 22%

Mana ger ta lks to other

suppliers of customer

a t lea st m on t h ly 12% 11% 13% 9% 16%

First informat ion from

fa m ily m em ber s 17% 19% 14% 19% 14%

Manufa cturer sets prices

by r ela tion sh ip w /cust 45% 40% 56% 41% 47%

Customer is reta il s tore/

w h olesa ler 42% 46% 32% 44% 45%

Log age of manufa cturer

1 (yea r s) 1.61 1.68 1.48 1.62 1.61

Log size of manufa cturer

(# of em ploy ees) 3.54 3.28 4.11 2.96 4.68

Firm receives credit from

ba n k 21% 17% 31% 18% 38%Avg. %of bills paid to t wo

identified suppliers

a ft er deliver y 40% 40% 41% 39% 42%

C ust om er is for eign -ow ned 32% 0% 100% 20% 54%

%of manufacturer s sa les

fr om la r gest pr oduct 85% 84% 88% 88% 81%

Ma na ger spea ks C h in ese 32% 30% 35% 29% 37%

Customer is firms first

cust om er 41% 39% 45% 41% 42%

Manufa cturer locat ed in

H a n oi 34% 31% 42% 32% 39%


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one similar m an ufacturer nearby, and 38 percent sa id there were

t h r e e o r m o r e su ch fi r m s. Se co n d , t h e su r ve y a sk e d w h e r e t h e

respondent firms most important competitor was located; one-

t h ir d sa id t h e ir m a in r iva l w a s in t h e sa m e n e ig h bor h ood . Mo r e

ma nufacturers of similar goods nearby or an importa nt competi-

tor locat ed in th e sam e neighborhood lower th e customers costs offi nding and using a n alt ernative supplier.

The second set of independent variables measures the infor-

m a t ion t h e m a n u f a ct u r er g a t h e r s d ir e ct ly a bou t i t s cu st om e r

through its direct contact with the customer. The prediction is

th a t better informa tion mean s more credit. One source of informa -

tion a bout the customer s reliability is direct experience in tr a ding

w ith th e cust omer. We measure this by th e durat ion of th e tra ding

relationship. However, ma ny of the int erfirm relationships in our

d a t a a r e n ew : 42 per cen t h a v e l a s t ed a y ea r or l es s. Th u s,experience in dea ling w ith the customer provides lit t le informa -

t i on f or m a n y of t h e fi r m s , a n d ot h er s ou r ce s of i n for m a t i on

become relevan t. Visits to t he customers factory or store might

provide information about the level of the customers reliability.

Forty -six percent of our respondents sa id they visit ed the custom-

ers fa cility a t least once before the business relat ionship sta rted.

Also, we a sked the manufa cturers how frequently t hey visit with

the identified customers currently. In 23 percent of t he relat ion-

ships the manufa cturers said they visit at least w eekly.9

The third set of independent variables represents member-

ship in business or social networks. As discussed above, these

variables might capture either or both of (a)information about the

customers reliability and (b) the possibility of using community

san ctions aga inst the customer. The prediction is t ha t , for either

of these reas ons, more credit is gra nt ed when th e fir m belongs to a

network. First , mana gers were asked how they fir st learned about

the customer before beginning trade with it. The categories, with

the percentage of firms indicating the given response in parenthe-ses, w ere no informa tion (21 percent), other simila r producers (11

percent ), other suppliers (10 percent ), bus iness a ssociat ions (4

percent), government (2 percent), own resear ch (51 percent),

former employer (2 percent), family (17 percent), and other (11

percent). (The responses sum to more than 100 percent because

ma ny fi rms indicat ed more tha n one informa tion source.) We use

9. This response indicates either a visit by t he respondent t o the customersfacility or a v isit by the customer to th e respondent s factory.


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t h e se r e sp o n se s t o cr e a t e va r ia ble s in d ica t in g in f o r m a t io n o b-

ta ined from social or business netw orks. Other similar produc-

ers, other suppliers, an d business as sociat ions a re combined

a s bu sin e ss n e t w or k s, a n d f a m ily in d ica t e s f a m ily n e t w or k s.

Second, the survey also asks wh ether the customer wa s ma na ged

by a family member or fr iend at the t ime of the first transaction.This is a broader measure of social networks, including friends as

well as family. I t is also arguably a stronger measure, in that the

family member or fr iend manages the customer rather than just

providing informa tion a bout the customer. Third, t he respondent s

w e r e a sk e d h o w f r e q u e n t ly t h e y t a lk t o o t h e r su p p lie r s o f t h e

particular customer. Talking to other suppliers not only potentially

generates information about the customers reliability, but also allows

stronger sanctions aga inst any customer tha t fails to pay its debts: the

punishment for failure to pay might bring a blacklisting from the otherma nufacturers. Twelve percent of manufa cturers ta lk with other

suppliers of the customer at least monthly.

The network variables, as noted, could represent either the

informa tion about th e reliability of tra ding partners tha t th e firm

co u ld g e t by t a lk in g w it h o t h e r m a n u f a ct u r e r s o r t h e a bil i t y t o

dam age the reputat ion of a customer tha t fa ils to pay its debt. Is it

p ossible t o se pa r a t e in f or m a t io n f r om sa n ct ion s? I n f or m a t io n

a b ou t t h e r el ia b il it y of a cu st om er i s m os t v a lu a b le a t t h e

beg in n in g of a r e la t io n sh ip . Th e a bili t y t o sa n ct ion a t r a d in gpartn er ha s m ore enduring effects. Thus, w here the informat ion

component is important , the effects of business and social net-

works should diminish as trading relat ionships age; where sanc-

tions a re importa nt , the n etwork effects should endure. We sha ll

test t his by intera cting the thr ee netw ork variablesinforma tion

f r om m a n u f a ct u r e rs, in f or m a t io n f r o m f a m ily, a n d t a lk in g w it h

supplierswith the duration of the relationship.

Table I II summa rizes the predicted signs of th e effects of t hese

three sets of variables on th e a mount of tra de credit gra nt ed.

VI. C REDIT TO C USTOMERS

In t his section we examine the determinant s of the surveyed

fi rms willingness to offer credit t o their customers. An a verage of

38 p e r ce n t o f t h e g o o d s a r e p a id f o r a f t e r d e live r y . B u t in 47

percent of the cases, no portion of the amount due is paid after

delivery; in 21 percent the entire bill is paid aft er delivery. Thelevel of credit is t reated a s a censored va riable, with the desired



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level of credit observed only w hen it falls betw een zero and 100

percent . For va lues below zero, we observe zero; for valu es a bove

100 percent, we observe 100 percent. Denoting the desired level of

tr a de credit offered to customer ia s T C*i,

T C*i Xi Zi I n di i,

w h e r e Xi is a vector of independent variables (as discussed in the

previous section), Zia vector of variables measuring other factorsaffecting credit, I n dia vector of industry dumm ies, and E(i) 0.

Given censoring, the observed level of trade credit offered cus-

tomer i is

T Ci T C*i for 0 T C*i 1

T Ci 0 for T C*i 0, a n d

T Ci 1 for T C*i 0.

This is a sta nda rd t obit m odel wit h tw o-sided censoring. To aid th e

economic interpreta tion of the results , we report in Ta ble IV the

m a r g in a l e ff ect s of a ch a n g e in t h e in d ep en d e n t va r ia ble in t h e

uncensored range.10

10. McDonald a nd Moffit [1980] show t ha t a tobit coefficient can be decom-p os ed i n t o t w o p a r t s : t h e m a r g i n a l e ff ec t o f t h e i n d ep en d e n t v a r i a b l e i n t h eu n ce n s or e d r a n g e p lu s t h e c h a n g e i n t h e p r ob a b i li t y o f b e i n g c e n so r ed . Th ec oe ff ic ie n t s o n Ta b l e s I V, V, VI I , a n d VI I I r e pr e se n t t h e fi r s t p a r t o f t h i sdecomposition. The tobit coefficients can be recovered by dividing the coefficient

shown by t he percentage of the sam ple that is uncensored, shown a t t he bottom ofeach table.

TABLE III

D ETERMINANTS OF TRADE C R E D I T

Va r ia ble P r edict ed sign

Customer lock-in

Number of similar ma nufacturers within 1 km Most importa nt competitor w ithin 1 km

Manufa cturer information

Dura t ion of relat ionship

Visited customer before first sale

Currently visits customer at least w eekly

Network m embership

First information from other ma nufacturers

First informat ion from fam ily member

Talk t o other suppliers of customer a t least month ly




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TABLE IV

C U ST OME R C R E D I TTOBITS

P E R C E N T O F B IL L P AI D B Y C US TOMER AFTER D E L IVE R Y

(1) (2) (3) (4)(5)

Domestic(6)

Foreign(7)B ig

(8)Small

Cust omer lock-in:

# similar ma nufac-tu rers w /in 1 km

0.007(1.66)

0.008(1.86)

0.011(2.98)

0.010(2.54)

0.006(1.35)

0.018(2.30)

0.026(3.10)

0.006(1.38)

Most important com-petit or w /in 1 km

0.13(2.46)

0.12(2.18)

0.11(2.18)

0.16(2.92)

0.14(2.41)

0.01(0.12)

0.04(0.43)

0.19(3.12)

Manufacturer informa-tion:

Dura tion of relation-ship (years)

0.08(2.96)

0.07(2.61)

0.07(2.51)

0.07(2.42)

0.04(1.34)

0.13(1.34)

0.14(1.74)

0.06(1.90)

Duration 2 0.005(2.15)

0.004(1.95)

0.004(1.74)

0.004(1.78)

0.003(1.19)

0.007(0.55)

0.020(1.45)

0.003(1.43)

Visited customerbefore fir st sale

0.08(1.63)

0.07(1.71)

0.06(1.33)

0.12(2.32)

0.04(0.36)

0.03(0.41)

0.10(1.87)

Currently visit custat least weekly

0.03(0.46)

0.06(1.03)

0.05(0.84)

0.09(1.43)

0.07(0.49)

0.06(0.60)

0.05(0.76)

Network membership:

First informationfrom other ma nu-facturers

0.20(3.36)

0.16(2.83)

0.10(1.99)

0.17(2.98)

0.06(1.00)

0.22(2.05)

0.11(1.30)

0.00(0.03)

Talk t o other sup-pliers of customerat least monthly

0.19(2.36)

0.19(2.63)

0.18(2.31)

0.27(3.18)

0.04(0.26)

0.19(1.31)

0.31(3.20)

First informationfrom familymember

0.04(0.60)

0.01(0.17)

0.08(1.34)

0.13(2.11)

0.13(1.91)

0.02(0.17)

0.00(0.01)

0.15(2.15)

Alternative explana -

tions:Manufacturer sets

prices by relation-ship w /custom er

0.02(0.53)

0.08(1.69)

0.06(1.13)

0.05(0.48)

0.14(1.62)

0.00(0.03)

Customer is retailstore/w holesa ler

0.07(1.62)

0.03(0.60)

0.11(2.25)

0.02(0.20)

0.20(2.11)

0.03(0.57)

Log firm age 1(years)

0.09(1.76)

0.10(1.57)

0.11(1.91)

0.25(1.62)

0.01(0.04)

0.06(1.04)

Log employment 0.02(0.98)

0.06(2.28)

0.04(1.50)

0.05(1.15)

0.10(0.95)

0.07(1.86)

Manufacturerreceives creditfrom bank

0.02(0.36)

0.03(0.53)

0.01(0.10)

0.05(0.55)

0.04(0.45)

0.15(2.02)

%of bill paid to

suppliers afterdelivery (02)

0.40

(6.27)

0.47

(6.23)

0.40

(5.45)

0.13

(1.08)

0.35

(2.74)

0.39

(5.25)

Industry cont rols Yes Yes Yes Yes Yes Yes Yes Yes

Ma na ger cont rols No No No Yes No No No No

Number of observa-tions

224 224 224 204 153 71 76 148

%obs not censored 31.70% 31.70% 31.70% 31.37% 35.95% 22.54% 34.21% 30.41%

2 73.5 82.6 134.5 152.0 114.7 48.7 64.1 112.5

p-value 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001

Regression a re tw o-ta iled Tobits. Coefficients are mar ginal effects,t-values ar e in parentheses.a. All regressions include industry dummies (8), and indicat ors of first customer an d locat ion in Hanoi.

b. Regression 4 also includes %sales represented by main product, mana ger speaks Chinese, %sales toSOEs, % supplies from SOEs, 100% family-owned, collective, ma nager formerly worked for S OE, a ge ofmanager, and manager attended university.




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The regression reported in t he fi rst column of Ta ble IV uses

only the independent variables related to relat ional contracting.

The r emaining regressions in Table IV check the robustness of

these results, by adding variables suggested by the trade-credit

l i t er a t u r e a s w e ll a s con t r o ls r e la t e d t o m a n u f a ct u r er a n d m a n -

ager characterist ics. All of the regressions include dummy vari-a ble s con t r o ll in g f or (a ) t h e fi r m s in d u st r y, (b) w h e t h e r t h e

customer is the oldest or the most recent of the firms ongoing

customers, and (c) the respondents location (Hanoi or Ho Chi

Minh City).

A. Ba sic Regr essions

T h e fi r st se t o f va r ia ble s r e p r e se n t s t h e e a se w it h w h ich a

customer can fi nd a n a lternat ive supplier. The prediction is tha t ,

when a customer can find an alternative supplier more easily, lesstrade credit will be granted. As discussed above, we proxy this

w it h t w o va r ia bles: t h e n u m be r of ot h e r p r od u ce r s o f s im ila r

products located within one kilometer of the respondent firm, and

w h e r e t h e r es pon d en t fi r m s m os t i m por t a n t com pe t it or w a s

located. The tobits indicate tha t each a ddit iona l nearby ma nufac-

turer results in a lmost 1 percent less of th e bill being paid aft er

delivery ( 0.007, t 1.66). Where t he ma in competitor is

nearby, the portion of the bill paid a fter delivery falls by thirteen

percent a ge points (t 2.46). Thus, customers who can more easilylocate a n a lternat ive supplier t o the surveyed fi rm do receive less

credit.11

The second set of independent va ria bles measures t he qua lity

of informat ion our man ufacturers ha ve directly a bout their custom-

ers. The prediction is that better information means more credit.

We fi n d t h a t a l on g er d ur a t ion of a t r a d in g r el a t ion s hi p i s

sig n ifi ca n t ly a sso cia t e d w it h la r g e r cr e d it , a t a r a t e t h a t d im in -

ishes with time. The level of credit increases by 7 percent in the

first year of a trading relat ionship. After a duration of two years(t h e m e a n d u r a t ion ), t h e a m o u n t of cre d it of fe r ed is f ou r t e en

percentage points higher than new relationships. 12 A likelihood-

11. A more direct measure of the customers a lternat ive comes from askingthe ma nufacturers for their est ima te of how long it would take the customer to findan alt erna tive supplier. This var iable is ava ilable for a subset of the sample, 195 ofthe observat ions. Customers taking longer tha n a w eek to find a new supplier aremore likely to get credit. In unreported regressions available from the authors, thevaria ble is s ignificant a t the .10 level.

12. All but tw o relat ionships ha ve durat ions of seven years or less . The tw o

exceptions have durations of 15 and 23 years. While we have no reason to excludethese observat ions, they do have a large effect on the est imated t enure effects . I f




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rat io test shows tha t the durat ion varia bles are jointly significant

(2 11.54,p-value .01).

The third set of independent variables represents business

and social networks. Business networks appear to support trade

credit . Where first information about the customer comes from

other m an ufacturers, tw enty percenta ge points m ore of th e bill ispaid a fter delivery; this is sta t ist ically significant at the 1 percent

l ev el i n t h e r eg r es s ion r ep or t ed i n col um n (1). We fi n d n o

significant relat ionship, however, between gett ing information

f r om f a m ily m e m ber s a n d g r a n t in g cr ed it ( 0.04, t 0.60).13

This insignifican t interaction is robust to the broader m easure of

so cia l n e t w o r k s, in clu d in g f r ie n d s a s w e ll a s f a m ily , d iscu sse d

a bove ( 0.05,t 0.69, results not sh own on ta ble).

We next consider t hree va ria bles measu ring explicit efforts to

ga th er informa tion about a customer. We excluded th ese varia blesfrom the first regression because such efforts may be endogenous

to the credit decision. Manufacturers providing credit to a cus-

tomer have a greater incentive to gather information about that

customer. These extra varia bles cause lit t le change in the signifi -

cance of the effects discussed above (see column (2)). 14 The fi rst of

t h e se va r ia ble s is t h e f r e q u e n cy w it h w h ich t h e m a n u f a ct u r e r

ta lks t o oth er suppliers of the pa rticula r cust omer. The 12 percent

of ma nufacturers w ho talk w ith other suppliers of the customer a t

least monthly grant their customers nineteen percentage pointsmore credit (t 2.36). The second va ria ble is visit s t o the cust om-

ers factory or store before beginning the trading relat ionship.

Visit ing the customers fa cility before the fi rst tra nsa ction is also

positively associated with delayed payment, although the effect of

prior visits falls below the .10 signifi cance level in column (2)

( 0.08, t 1.63). The third such variable is the frequency of

they a re excluded from th e data , the coefficients on durat ion a nd dura t ion squaredare 0.13 and 0.016, respectively. E st imat ed credit during t he fi rst two years ofthe relationship increases from fourteen to twenty percentage points. Exclusion ofthese tw o observa tions ha s a negligible effect on the other estima ted coefficients.

13. Becau se the cat egories ar e not mut ua lly exclusive, there is no base group.How ever, we ra n all of the regressions wit h dumm ies for own resea rchan d othersources,the latter comprised of government,former employer,and other.Thetwo a ddit ional dummy va riables had n o significant effect on th e results . They wereexcluded from the fi na l specifi cations to simplify th e exposition.

14. En dogeneity is arg uably less of a problem for the va ria bles in column (1).The decision to give credit cannot be ma de before the fa ctory is establish ed and t hecustomer is identifi ed. However, if relat ionships with higher init ia l levels of t rusthave longer durat ion, then our durat ion variable may be biased upwa rd. Our dataset does not contain any obvious instruments for relat ionship durat ion. For a

discussion of a comparable problem with job tenure in work relat ionships, seeAltonji and Williams [1997].




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visits with the identified customers currently. Ongoing visits have

a v er y s m a ll n eg a t iv e a s s oci a t ion w i t h cr ed it ( 0.03,

t 0.46).15

B . R obustness Ch ecks

The foregoing results are consistent with a story of coopera-tive relat ionships sustained by market fr ict ions. The remaining

regressions in Table I V examine t he robustness of these results.

Co lu m n (3) a d d s va r ia bles su g g est e d by t h e l i t e r a t u r e o n t r a d e

credit (these are discussed in more detail in Section VIII below).

Co lu m n (4) a d d s f u r t h e r co n t r o ls r e la t e d t o m a n u f a ct u r e r a n d

m a n a g er ch a r a ct er ist ics . Th e se a d d it ion a l va r ia bles h a ve l i t t le

effect on the relational-contracting coefficients. Columns (5) to (8)

break the sample into domestic and foreign customers and large

and small manufacturers; as discussed below, firms with foreigncustomers show some different patterns in granting credit than

fi r m s w it h d o m e st ic cu st o m e r s, a n d la r g e r fi r m s be h a ve d if f e r -

ently from sma ller fi rms.

Manufa cturers may be unable to grant t rade credit if they are

fi na ncially constra ined. We consider the effect of bank loans an d

credit from customers. Those who currently receive credit from

banks are less likely to be constrained, but we find no effect of the

l oa n s on t h e p rop en s it y t o g r a n t cr ed i t ( 0.02, t 0.36).

However, receiving credit from suppliers significant ly increasesthe likelihood of offering credit to customers. Our mea sure of this

i s t h e a v e ra g e p er cen t a g e of b il ls p a id t o t h e t w o s u pp li er s

identified in the survey after delivery of inputs, ranging from zero

to one. Firms pay ing th e sam ple mean of 40 percent of their supply

bills aft er delivery give 16 percent more credit to th eir customers

tha n fi rms who pa y for none of their supplies after delivery. This

proxy for credit from suppliers is clea rly im perfect, since we do not

know how important these suppliers are beyond that they each

represent at least 3 percent of the firms procurement bill . Wesuspect t ha t the posit ive a ssociation betw een receiving credit

from suppliers and gran ting credit to customers is also proxying

for differences in credit practices in different product lines.

Given the heterogeneity of the sample, controlling for indus-

1 5. F r e q u en t v i si t s m a y s i m pl y r e fl e ct f r eq u e n t d e li v er i es o f g o od s . F o rexample, 16 of the 35 fir ms producing food products (46 percent) visit t heircustomers a t least once a weekdouble the sa mple mean. This probably refl ectsthe perishable natur e of the products , ra ther tha n explicit informat ion gathering.

Nevertheless, if important information is gathered in the course of delivery, weshould expect to find t hat these manufa cturers are more willing to grant credit .


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try norms is important. For example, talking with other suppliers

of customers might be common among garment producers, where

credit a lso happens to be relat ively more common. If so, then t he

positive coefficient on talking to suppliers may be spurious. We

believe that we have adequately controlled for this heterogeneity.

F ir st , a l l o f t h e e q u a t io n s in clu d e e ig h t in d u st r y d u m m y va r i-ables. (Their coefficients are shown in Appendix 1.) Second, the

inclusion of the var iable mea suring credit fr om suppliers provides

a n ad ditiona l control for the level of credit gra nted in ma nufa ctur-

ers product line. Third, the correlations between the industry

d u m m ies a n d t h e r e la t io n a l-con t r a ct in g va r ia bles (sh ow n in

Appendix 2) are a s big a s 0.15 in only 6 of 72 cases. Moreover, in

seven of the nine industries, the correlation between the industry

d um m y a n d t a l ki ng t o s up pl ier s i s oppos it e i n s ig n t o t h e

correlation between the industry dummy and information frommanufacturers.

As a further check on the robustness of the results, we added

(in colu m n (4)) se ver a l fi r m a n d m a n a g er ch a r a ct e r ist ics , a s

described in th e notes t o Ta ble IV. About 10 percent of th e sa mple

is lost because of nonresponses to questions related to manager

characterist ics.16 I n t h is r e gr e ssion t h e va r ia ble r e p r ese n t in g

in for m a t io n f r om f a m ily m e m ber s is n e g a t ive a n d sign ifi ca n t a t

the .10 level ( 0.13, t 2.11).17 Inclusion of these controls

h a s l it t le e ff ect on t h e ot h e r r e la t io n a l-con t r a ct in g va r ia bles.Among the controls added to column (4), we include a variable

indicat ing whether th e mana ger speaks C hinese to test for ethnic

netw ork effects; w e found no effect ( 0.02,t 0.36, not shown).18

The fourth regression a lso tests for effects of membership in tr a de

associations. In 35 percent of the relationships in the sample, the

manufacturer belongs to a trade association. The trade associa-

t ion s t o w h ich 9 p e r ce n t of t h e sa m p le m a n u f a ct u r er s belon g

p r ovid e in f or m a t io n on t h e r e lia bili t y of t r a d in g p a r t n e r s or

16. The nonresponses a re t o quest ions on educat ion (16), C hinese langua geabilit y (7), and w ork in a sta te-owned ent erprise (2). The chan ges in t he coefficientsbetween columns (3) an d (4) do not a ppear t o be the result of th e change in sam ple.When the column (3) specification is run on the reduced column (4) sample, thecoefficients ar e simila r t o those in column (3).

1 7. Wh e n t h e a l t e r n a t i v e m e a s u r e o f s o ci a l n e t w o r ks , t h e c us t o m er i sm a n a g ed b y a f a m i ly m e mb er or f r ie nd , r e pl a ce s i n for m a t i on f r om f a m i lymembers, it s coefficient is essent ially zero ( 0.004, t 0.07).

18. I n precommunist V ietna m, a ccording to B art on [1983], interfi rm net-works were a specifically ethnic-Chinese phenomenon; the ethnic-Vietnamesemerchants were una ble to establish trust among t hemselves. The lack of effect ofour Chinese-language dummy in the est imation equations to the contrary sug-

geststhough it is not a conclusive testtha t t he present-day relat ionships maynot be shaped by ethnic ties.


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ar bitrat ion services. We fi nd n o evidence tha t membership in a

t r a d e a sso cia t ion p r ovid in g t h e se se r vice s a f f ect s t h e level of

credit offered customers ( 0.02,t 0.29, not shown).

The relational-contracting variables, therefore, are generally

robust to the inclusion of addit ional controls. Information from

family members is the only measure that changes sign or signifi-cance, becoming signifi cantly negative in the fourth specifi cation.

The estimated marginal effect of other variables changes some-

wh at with the specificat ion, but fewer similar fi rms nearby, longer

relationship durations, and information from business networks

are all consistently associated with higher levels of credit.

Columns (5) thr ough (8) of Ta ble IV exam ine w hether these

determinant s of th e willingness to offer credit va ry depending on

whether the manufacturing is selling domestically or overseas, or

w h e t h e r t h e m a n u f a ct u r e r is la r g e o r sm a ll . O n e - t h ir d o f t h ecustomers in the data are foreign-owned.19 The determina nts of

credit in export relat ionships may differ from those in domestic

relat ionships. Tra ding compa nies and other middlemen ma y play

a bigger role in exporting, and subcontra cting arra ngements ma y

be more common. The fi fth a nd sixth columns split th e sam ple into

d om e st ic a n d f or e ig n cust om e r s. Th e m o st d ir ect com m u n it y

sanctionstalking to other suppliers of the customeris impor-

ta nt only for domestic customers ( 0.27, t 3.18); t here is no

a sso cia t ion bet w e e n loca l g ossip a n d g ivin g cre d it t o f or e ig ncustomers ( 0.04, t 0.26). Similarly, visits before the first

transaction has a significant effect only for domestic customers.

However, foreign trading partners receive 22 percentage points

more credit if the init ial contact came through manufacturers of

similar goods, an effect th at is smaller and insignifica nt w hen the

customer is a domestic fir m ( 0.06, t 1.00). The m ea sur es of

t h e d u r a t ion of t h e r e la t ion sh ip r e t a in t h e ir s ig n bu t lose t h e ir

signifi cance for foreign customers.

Small firms might be expected to rely more than large firmson community sa nctions t o support credit relat ionships. B ilatera l

sa n ct ion s a r e a m or e p ow e r f u l t h r e a t com in g f r om la r g e r fi r m s.

Moreover, larger fi rms a re more likely to ha ve alterna tive means

of enforcing contr a cts: for example, 12 percent of firm s w ith m ore

than 50 employees and only 5 percent of firms with 50 or fewer

employees said there is a third party that can enforce contracts

1 9. O f t h e 7 1 e x po r t c u s t om e r s i n t h e s a m p l e, 11 a r e d e s cr i b ed a s b e in g

l o c a t e d i n t h e s a m e c i t y a s t h e r e s p o n d e n t . T h e s e m a y r e p r e s e n t e i t h e r l o c a lbuying offices for export cust omers or local operat ions of foreign companies.


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with their customers (t 1.26). Columns (7) and (8) report tobits

for credit given by fi rms w ith more than 50 workers and fi rms w ith

50 or fewer workers, respectively.20 F o r s m a l l fi r m s , c r e d i t i s

significantly associated with talking regularly with other suppli-

ers of the customers ( 0.31, t 3.20). Although la rge fi rms a re

more likely to talk regularly with other suppliers of their custom-e r s (Ta ble I I ), t h e r e is n o a ssocia t ion bet w e e n d oin g so a n d

granting credit for large firms ( 0.19, t 1.31). Visiting the

customers facility before the first sale is associated with higher

levels of credit among small fi rms but not large fi rms. La rge firm s

give twenty percentage points more credit to customers that are

reta il stores or wh olesa lers. This sug gests t ha t t he recovery/resell

option may be important for larger firms, since retail stores are

less likely to have transformed the merchandise than customers

t h a t bu y t h e g o o d s f o r u se a s in p u t s. F in a l ly , la r g e fi r m s g ivefourteen percenta ge points more credit in relat ionships where

prices are determined by the relat ionship with the customer,

t h is r e su lt is co n sist e n t w it h la r g e fi r m s u sin g cr e d it t o p r ice -

discriminate. The consistent pattern of these results, then, is that

large firms tend to follow industrial-organization rationales for

g r a n t i n g c r e d i t ; a n d s m a l l fi r m s r e l y m o r e h e a v i l y t h a n l a r g e

firms on community-based information and enforcement.

C. I nteraction E ffectsNetwork membership provides a manufacturer both informa-

t io n a bo u t t h e r e l ia bil i t y o f t r a d in g p a r t n e r s a n d t h e a bil i t y t o

dam age th e reputa tion of a customer tha t fa ils to pay its debt. We

n ow t r y t o se pa r a t e in f or m a t ion f r om sa n ct ion s, by n ot in g t h a t

information about the reliability of a customer is most valuable at

the beginning of a relat ionship, whereas the a bility t o sanction a

t r a d i n g p a r t n er h a s m or e en d u ri n g eff ect s . We t e st t h i s b y

interacting th e three network variablesinforma tion from ma nu-

facturers, information from family, and talking with supplierswith the dura tion of the relat ionship and its squa re.

The results, shown in Table V, suggest tha t sanctions a re a

component of the three network variables. The table shows the

estima ted cumula tive effect of each of th e three network var iables

for the fi rst four yea rs of rela tionship. More tha n 90 percent of the

relationships in th e sample have a dura tion of four years or less,

20. While there is a positive correlat ion between being big and ha ving export

clients, 42 percent of exporters h ave 50 or fewer employees, and a lmost ha lf of thecustomers of big firms are domestic.


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a nd 79 percent h a ve dura tions of thr ee years or less. The effect of

g e t t in g in i t ia l in f or m a t io n a bou t t h e cust om e r f r om a n o t h e r

m a n u f a ct u r e r g r ow s sl ig h t ly over t im e (f r om e ig h t p er ce n t a g e

points in yea r 1 to thir teen percent ag e points in yea r 4); th e effect

of talking regular ly with suppliers increases in the fi rst t wo years,

an d t hen fa lls. The effect of gett ing init ial informa tion about t he

customer from a fa mily member, wh ich is negat ive from the sta rt ,

becomes m ore so initia lly before rebounding. The 2 tests indicate

that the addit ional variables are jointly significant in none of the

first three equations

interfirm relationships_ informal credit_vietnam

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