Interfirm Relationships - Informal Credit - Vietnam

I NTERFI RM RELATI ONSHI PS AND I NFORMAL CREDI T
I N VI ETNAM*
JOHN MCMI LLAN AND CHRI STOPHER WOODRUFF
Tradi ng rel ati ons i n Vi etnams emergi ng pri vate sector are shaped by two
market fri cti ons: the di ffi cul ty of l ocati ng tradi ng partners and the absence of l egal
enforcement of contracts. Exami ni ng rel ati onal contracti ng, we nd that a rm
trusts i ts customer enough to offer credi t when the customer nds i t hard to l ocate
an al ternati ve suppl i er. Al onger durati on of tradi ng rel ati onshi p i s associ ated wi th
l arger credi t, as i s pri or i nformati on gatheri ng. Customers i denti ed through
busi ness networks recei ve more credi t. These network effects are enduri ng,
suggesti ng that networks are used to sancti on defaul ti ng customers.
I . I NTRODUCTI ON
Fi rms routi nel y rel y on other rms goodwi l l . Where a wel l -
functi oni ng l egal system exi sts, i n advanced economi es, ongoi ng
rel ati onshi ps compl ement formal contracts i n hel pi ng deal s work
smoothl y [Macaul ay 1963; Hal ey 1997]. Where l aws of contract
are i nadequate, i n many devel opi ng and transi ti on countri es,
i nformal rel ati onshi ps can substi tute for the courts i n al l owi ng
deal s to be made [Grei f 1997; McMi l l an 1997]. Ongoi ng or
cl i entel i sti c rel ati onshi ps have l ong been studi ed by soci ol ogi sts,
anthropol ogi sts, and economi c hi stori ans.
1
They have been l i ttl e
studi ed econometri cal l y, however, because data are hard to come
by and because the dependent vari abl e, the success of the
rel ati onshi p, can be hard to measure.
A survey of pri vate rms i n Vi etnam i s used i n thi s paper to
exami ne rel ati onal contracti ng. The survey gi ves data on a rms
rel ati onshi ps wi th speci c customers and suppl i ers. Taki ng as our
* We thank Jul i an Betts, Stephan Haggard, Edward Lazear, Garey Ramey,
James Rauch, Joel Sobel , Lars Stol e, Frank Upham, Di mi tri Vayanos, Joel
Watson, Andrei Shl ei fer, and three referees for comments; and Nguyen Vo Hung,
Nguyen Thanh Ha, Steven Kul l back, Li em Le, Trac Pham, and Tamara Ri chard-
son for runni ng the surveys. The data col l ecti on was supported by the Vi etnam-
Paci c Program and the Academi c Senate of the Uni versi ty of Cal i forni a, San
Di ego, the project on I nsti tuti onal Reform and the I nformal Sector, and the
Wi l l i am Davi dson Center. The data are avai l abl e at http://WWW-I RPS.UCSD.EDU/
facul ty/cwoodruff.
1. Geertz [1978] denes cl i entel i zati on as the tendency for repeti ti ve purchas-
ers of parti cul ar goods and servi ces to establ i sh conti nui ng rel ati onshi ps wi th
parti cul ar purveyors of them rather than search wi del y through the market at
each occasi on of need. Ongoi ng rel ati onshi ps i n vari ous setti ngs have been
studi ed by Barton [1983], Grei f [1993, 1994], Mi l grom, North, and Wei ngast
[1990], and Podol ny and Page [1998].
1999 by the Presi dent and Fel l ows of Harvard Col l ege and the Massachusetts I nsti tute of
Technol ogy.
TheQuarterlyJ ournal of Economics, November 1999
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measure of a rms trust i n i ts customer the amount of trade credi t
i t grants, we ask what the determi nants of busi ness trust are.
Our mai n ndi ngs are that trade credi t tends to be offered
when (a) i t i s di ffi cul t for the customer to nd an al ternati ve
suppl i er; (b) the suppl i er has i nformati on about the customer s
rel i abi l i ty through ei ther pri or i nvesti gati on or experi ence i n
deal i ng wi th i t; and (c) the suppl i er bel ongs to a network of si mi l ar
rms, thi s busi ness network provi di ng both i nformati on about
customers rel i abi l i ty and a means of sancti oni ng customers who
renege on deal s. Soci al networks, based on fami l y ti es, al so
support rel ati onal contracti ng, al though the evi dence for thei r
effi cacy i s weaker than for busi ness networks.
I I . RELATI ONAL CONTRACTI NG
Our ai m i s to test some hypotheses about rel ati onal contract-
i ng. What determi nes the l evel of busi ness trust? A suppl i er
agreei ng to accept payment after del i very of the goods must
somehow ensure that i ts customer abi des by the agreement. I n the
absence of a formal l egal system to enforce contracts, repayment
must be enforced i nformal l y. I nformal enforcement often takes the
form of repeated, ongoi ng rel ati ons; the suppl i er trusts the
customer because i t knows the customer has an i ncenti ve to repay
i n order to mai ntai n i ts rel ati onshi p wi th the suppl i er.
Vi etnam provi des a stri ngent test of the workabi l i ty of
rel ati onal contracti ng, for Vi etnamese pri vate rms do not yet
have a formal l egal system to fal l back on. The devel opment of
formal i nsti tuti ons to support a market economy fai l ed to keep
pace wi th the growth of the pri vate sector vi a the entry of new
rms that started wi th the reforms of the mi d-1980s. When our
surveyed managers were asked whether the courts coul d enforce a
contract wi th a customer, 91 percent sai d they coul d not.
2
We take as our measure of trust the fracti on of the payment
made after del i very of the goods; thi s i s our dependent vari abl e. I n
what ci rcumstances does the ongoi ng nature of a rel ati onshi p
2. Some l egal reforms have been enacted: consti tuti onal reform establ i shed
the protecti on of pri vate property i n 1992, and l egi sl ati on establ i shi ng busi ness
courts was passed i n 1994 [Gi l l espi e 1993; Pham Van Thuyet 1996]. But by the
ti me of our survey, 19951997, the courts evi dentl y were sti l l not accessi bl e to
rms. Vi etnams si tuati on i s worse than even the former Sovi et Uni ons: i n a 1997
survey aski ng the same questi on, 55 percent of Ukrai ni an rms and 58 percent of
Russi an rms sai d the courts coul d enforce contracts [Johnson, McMi l l an, and
Woodruff 1999].
QUARTERLY J OURNAL OF ECONOMI CS 1286
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assure the suppl i er that the customer wi l l repay a debt? The
i ndependent vari abl es, suggested by repeated-game theory, repre-
sent the customer s abi l i ty to nd al ternati ve tradi ng partners,
the suppl i er s gatheri ng of i nformati on about the customer, and
network rel ati onshi ps.
3
The customer s abi l i ty to buy from al ternati ve suppl i ers
mi ght affect the l evel of trust and thereby determi ne the amount
of trade credi t granted. The customer coul d be l ocked i nto the
rel ati onshi p, ei ther because i t woul d have hi gh costs of search for
another suppl i er or i t woul d i ncur l arge transport costs i n buyi ng
from another suppl i er. I f the customer i s l ocked i n, the suppl i er
can threaten to cut off further trade i f the debt i s not repai d. Fi rms
that nd i t di ffi cul t to l ocate al ternati ve tradi ng partners wi l l
i nvest i n mai ntai ni ng thei r exi sti ng rel ati onshi ps [Kranton 1996;
Ramey and Watson 1996]. One of the managers, for exampl e,
expl ai ned he has a troubl e-free rel ati onshi p wi th hi s customers
because the product i s speci al i zed and not avai l abl e i n the
market so both the enterpri se and i ts customers have to depend on
each other. Lock-i n hel ps make rel ati onal contracts workabl e.
Our rst hypothesi s, then, i s that customers lacking alternative
supplierswill receivemoretradecredit.
Fi rms characteri sti cs mi ght be di ffi cul t for other rms to
observe; rms have di fferent types [Wi l son 1985]. A customer
mi ght or mi ght not be dependabl e i n payi ng i ts bi l l s. The
suppl i er s di rect deal i ngs wi th the customer mi ght yi el d i nforma-
ti on about i ts credi tworthi ness. Fi rst, the suppl i er mi ght vi si t the
customer s pl ant or store before any sal e i s made. One manager
we i ntervi ewed sai d he vi si ts hi s customers to i nvesti gate thei r
nanci al capabi l i ty and personal i ty.Another sai d the amount of
credi t he al l ows depends on the rel i abi l i ty of the customer,
eval uated by vi si ti ng hi s shop. Vi si ts mi ght provi de i nformati on
about the customer s work habi ts and busi ness acumen. They
mi ght al so reveal the customer s i nvestment i n pl ant and equi p-
ment: l arge sunk i nvestments coul d serve as a si gnal of the
customer s rel i abi l i ty [Carmi chael and MacLeod 1997]. Second,
cooperati on mi ght bui l d up gradual l y, as the suppl i er l earns
through tradi ng about the customer s rel i abi l i ty. Some customers
mi ght have l ong ti me-hori zons whi l e others are y-by-ni ght rms.
By steadi l y i ncreasi ng the amount of trade credi t i t offers, the
3. Anecdotal evi dence on how the rms gather i nformati on and how they
mai ntai n agreements, based on i ntervi ews wi th the managers we conducted al ong
wi th the survey, i s gi ven i n McMi l l an and Woodruff [1999].
I NTERFI RM RELATI ONSHI PS I N VI ETNAM 1287
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suppl i er can i nduce any rms that are unrel i abl e to break the
rel ati onshi p earl y and thereby can sort one type of rm from the
other [Ghosh and Ray 1996; Watson 1995]. The frequency wi th
whi ch a manufacturer vi si ts the customer duri ng the tradi ng
rel ati onshi p may i ndi cate the i ntensi ty of i nformati on gatheri ng.
Our second hypothesi s, then, i s that therewill bemoretradecredit
(a) when the supplier inspects the customer directly and (b) in
relationshipsof longer duration.
Our thi rd hypothesi s i s that a supplier belongingtoa network
will grant more trade credit. Thi s coul d be for ei ther of two
di sti nct, though not mutual l y excl usi ve, reasons. Fi rst, a network
mi ght provi de i nformati on. A rm mi ght l earn about the rel i abi l -
i ty of a customer not onl y through di rectl y deal i ng wi th i t but al so
by aski ng other manufacturers or fami l y members before the
tradi ng rel ati onshi p begi ns. (We shal l refer to the rst of these
i nformati on sources as a busi ness network and the second as a
soci al network.) Second, networks provi de not onl y i nformati on
about customers rel i abi l i ty but al so extra abi l i ty to sancti on
customers who renege. The threat of no further trade i f debts are
not pai d gai ns extra force i f i t comes not just from the rm owed
the money but al so from other rms i n the same l i ne of busi ness
[Kandori 1992]. Gossi p among the rms permi ts shari ng i nforma-
ti on on customers behavi or i n order to i mpl ement such commu-
ni ty sancti ons. Soci al networks al so provi de the possi bi l i ty of
enacti ng communi ty sancti ons. Communi ty sancti ons therefore
gi ve a basi s for trade credi t.
The two versi ons of the thi rd hypothesi s, i nformati on and
sancti ons, can be di sti ngui shed empi ri cal l y. Si nce a rm al so
l earns about i ts customer s rel i abi l i ty through i ts di rect deal i ngs
wi th i t, the i ni ti al i nformati onal rol e of networks shoul d di ssi pate
over ti me. I f communi ty sancti ons are i mportant i n el i ci ti ng
cooperati on, on the other hand, the effect of networks wi l l be
enduri ng.
4
4. Grei f [1993, p. 532] uses hi stori cal documents to argue that the el eventh-
century Maghri bi traders network offered sancti oni ng of traders who cheated, but
i ts purpose was not to provi de i nformati on about traders rel i abi l i ty. The cross-
country networks of ethni c-Chi nese traders i nvesti gated by Tri ndade and Rauch
[1997], on the other hand, appear to perform an i nformati on-provi si on rol e but not
a sancti oni ng rol e, i n that the Chi nese networks have more i mpact on trade i n
di fferenti ated products than i n homogeneous products. I nformati on matters wi th
di fferenti ated products because of matchi ng consi derati ons, whereas i f networks
were used for sancti oni ng purposes thei r effect shoul d be the same for homoge-
neous and di fferenti ated products.
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I I I . OTHER THEORI ES OF TRADE CREDI T
Al though our ai m i s to test the theory of rel ati onal contract-
i ng, our regressi ons wi l l al so i ncl ude some vari abl es suggested by
vari ous theori es of trade credi t i n the nance l i terature. These
theori es focus on devel oped countri es wi th functi oni ng l egal
systems and do not consi der rel ati onal contracti ng. Neverthel ess,
the determi nants of trade credi t that they i denti fy mi ght appl y i n
Vi etnam. We take these as subsi di ary hypotheses to the mai n
hypotheses l i sted above about rel ati onal contracti ng. I ncl udi ng
these vari abl es al so serves to check the robustness of the mai n
hypotheses. There are two sets of expl anati ons of why rms offer
credi t to thei r customers rather than l eavi ng nanci ng to speci al -
i sts l i ke banks.
One set of expl anati ons i s based on i ndustri al organi zati on. I f
the banki ng sector i s i mperfectl y competi ti ve, rms can use trade
credi t to avoi d payi ng monopol y rents to the banks [Emery 1987].
On the other hand, trade credi t mi ght be needed when the
banki ng sector i s too competi ti ve to al l ow ongoi ng rel ati onshi ps i n
whi ch the banks l ose money earl y i n a rel ati onshi p and earn
prots l ater [Petersen and Rajan 1995]. The market power of the
rms al so i s rel evant: a rm mi ght offer trade credi t to pri ce-
di scri mi nate covertl y, to evade l egal sancti ons, or to hi de pri ce
cuts from other customers [Brennan, Maksi movi c, and Zechner
1988]. Trade credi t can further serve as a warranty for product
qual i ty, si nce the del ay i n payment gi ves customers ti me to
i nspect the merchandi se [Long, Mal i tz, and Ravi d 1993].
Another set of expl anati ons rests on the advantages rms
have over banks i n sel ecti ng, moni tori ng, and enforci ng credi t
contracts. I nformati on avai l abl e as a by-product of day-to-day
tradi ng may al l ow the rms to see whi ch customers are better
credi t ri sks. I f the customer has no access to bank l oans, because
of the adverse-sel ecti on probl em, the sel l er mi ght have to grant
credi t i n order to make the sal e. Fi rms wi l l therefore recei ve more
trade credi t when they are recei vi ng l ess bank credi t [Bi ai s and
Gol l i er 1997]. Fi nal l y, i f a l oan i s not repai d, a manufacturer
mi ght be better equi pped than a bank to resel l repossessed
merchandi se [Mi an and Smi th 1992].
I V. THE SURVEY
Pri or to the mi d-1980s, essenti al l y al l economi c acti vi ty i n
Vi etnam was undertaken by state rms or col l ecti ves whose
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producti on was regul ated by state pl ans. The market was re-
pl aced by central pl anni ng after 1954 i n the north (Hanoi ) and
1975 i n the south (Ho Chi Mi nh Ci ty). The transi ti on back to a
market economy began i n the earl y 1980s, and gathered momen-
tum wi th a seri es of reforms undertaken i n 1986 (doi moi). The
1986 reforms l ed to a resurgence of pri vate sector acti vi ty. By 1993
pri vatel y owned rms outnumbered state rms over three to one
(19,762 to 6,019). They produced, accordi ng to offi ci al esti mates,
29 percent of i ndustri al output nati onwi de, concentrated i n l i ght
i ndustry.
5
Our data come from surveys of 259 nonstate rms i n Hanoi i n
19951996 and i n Ho Chi Mi nh Ci ty i n 1997. The surveyed rms
were drawn from l i sts of members of the Vi etnam Chamber of
Commerce and I ndustry (VCCI ). The sampl e probabl y does not
represent the Vi etnamese manufacturi ng sector as a whol e, as
rms that joi n the VCCI are l i kel y to be more successful than
average. The data are summari zed i n Tabl e I . The medi an rm
has 32 empl oyees, wi th two rms reporti ng four and two reporti ng
more than 300. Our sampl e reects the recent resurgence of the
pri vate sector. Most of the rms are new, wi th 60 percent havi ng
started l ess than four years before the survey was admi ni stered.
But 20 percentmostl y i n Hanoi began operati ng before 1986 as
col l ecti ves i n the pl anned economy; hal f of those were sti l l
col l ecti ves at the ti me of the survey.
6
Al l are manufacturers, wi th
roughl y 17 percent produci ng garments or footwear, 10 percent i n
each of the categori es of metal products, wood products, food,
constructi on materi al s, and paper/packagi ng, and the remai nder
from di verse i ndustri es. Metal and food-products compani es typi -
cal l y have 50 or fewer workers and garment and footwear
compani es more than 50. Most rms are owner-managed, wi th
two-thi rds bei ng more than hal f-owned by the top manager and
hi s fami l y, and 40 percent havi ng no owners outsi de the fami l y.
Fourteen percent are col l ecti vel y owned. The pri mary source of
start-up capi tal was the entrepreneur s own savi ngs, al though 47
percent of rms report some contri buti on to start-up capi tal from
nonfami l y partners and 10 percent report start-up l oans from
banks. Bank credi t i s recei ved by 22 percent of the rms, but trade
5. For background on Vi etnams reforms, see Fforde and de Vyl der [1996] and
Worl d Bank [1995].
6. These rms are i ncl uded i n the regressi ons reported bel ow. However, the
resul ts are not changed much when ei ther col l ecti ves, rms ol der than ten years,
or both of these groups are excl uded.
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credi t i s much more common, wi th 57 percent of ongoi ng customer
rel ati onshi ps and 53 percent of ongoi ng suppl i er rel ati onshi ps
i nvol vi ng trade credi t.
Whi l e al l the respondents are nonstate rms, state-owned
enterpri ses account for some of thei r sal es and suppl i es, al though
mostnearl y three-quarters of sal es and two-thi rds of suppl i es
TABLE I
SUMMARY OF SURVEY DATA
Category
Al l
rms
50
Empl oyees
50
Empl oyees
Number of rms 259 186 73
Hanoi 149 108 41
Ho Chi Mi nh Ci ty 110 78 32
Number of empl oyees
Medi an 32 25 94
Mean 52 25 122
Standard devi ati on 60 14 75
Age
14 years 60% 60% 60%
510 years 20% 19% 23%
10 years 19% 20% 16%
I ndustri es:
Metal 12% 15% 5%
Wood products 12% 12% 14%
Food 10% 11% 7%
Garments and footwear 17% 13% 29%
%of sal es to pri vate rms: 73% 71% 77%
%of sal es to customers l ocated:
Wi thi n same ci ty 56% 63% 40%
Outsi de ci ty, i n Vi etnam 23% 24% 23%
Exports 20% 13% 37%
%of suppl i es from pri vate rms: 68% 71% 60%
%of suppl i es from suppl i ers l ocated:
Wi thi n same ci ty 54% 58% 44%
Outsi de ci ty, i n Vi etnam 32% 30% 38%
Exports 14% 12% 18%
Ownershi p%of rms
100%fami l y-owned 40% 43% 33%
Have outsi de owners 43% 40% 49%
Col l ecti vel y owned 14% 15% 14%
Start-up nance%of rms
100%fami l y-nanced 41% 43% 34%
Some nance from partners 47% 46% 52%
Wi th bank l oan at start-up 10% 9% 14%
%of rms wi th current bank l oan: 22% 17% 37%
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i nvol ve nonstate customers and suppl i ers. We consi der onl y
rel ati onshi ps between the respondent rms and nonstate tradi ng
partners.
7
Most sal es go to customers i n the same ci ty as the respondent.
Thi s i s not the case for l arge rms, however, whi ch export more
than a thi rd of thei r producti on on average. Al though exports
account for 20 percent of producti on, 73 percent of rms export
nothi ng. Ni ne percent (24 rms) export al l of thei r producti on.
Two-thi rds of the exporters are i n the wood products, garment,
and footwear i ndustri es. Fi rms that export some of thei r output
are more l i kel y to have started wi thi n four years of the survey (82
percent versus 52 percent, t 4.49). Exporters al so i mport a
l arger porti on of thei r suppl i es (24 percent versus 10 percent,
t 3.25), wi th a smal l number (seven) i mporti ng al l of thei r
suppl i es and exporti ng al l of thei r output; these are probabl y
subcontractors for forei gn rms, al though the survey provi des no
further detai l on thi s.
The heart of the survey i s a seri es of questi ons about the
rms rel ati onshi ps wi th i ts rst customer and i ts most recentl y
added customer; and wi th i t l ongest runni ng suppl y rel ati onshi p
and i ts newest suppl y rel ati onshi p. These questi ons provi de us
wi th a sampl e of i ndi vi dual tradi ng rel ati onshi ps and gi ve a
further i ndi cati on of the l evel of market devel opment i n Vi etnam.
The medi an percentage of a manufacturer s total sal es goi ng to
each pri vate sector customer i denti ed i n the survey i s 30 percent.
The goods exchanged are not usual l y speci c to a buyer. I n
three-quarters of the rel ati onshi ps the manufacturers produce
the same good for other customers; i n al most 90 percent of the
cases, manufacturers say thei r suppl i ers have other buyers for the
same good. Manufacturers produce goods to l l speci c orders i n
l ess than hal f the rel ati onshi ps (46 percent of customer orders and
11 percent of suppl y orders), wi th the remai nder produci ng to
mai ntai n i nventori es. These data suggest that most of the tradi ng
rel ati onshi ps are not compl ex.
For each of the four speci c rel ati onshi ps, rms were asked
what proporti on of the sal es pri ce i s pai d i n advance of del i very, at
the ti me of del i very, and after del i very. I n open-ended i ntervi ews
accompanyi ng the survey, several rms sai d that i t i s common
practi ce to pay for one order when the next order i s del i vered.
7. The data i ndi cate that rel ati onshi ps wi th state-owned enterpri ses have a
di fferent character. Di fferences between pri vate and state-owned tradi ng partners
are l eft to future research.
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Others sai d a typi cal credi t term i s a month, wi th no expl i ci t
i nterest charged. Si nce any buyer offered such a schedul e woul d
nd del ayi ng payment to be opti mal , we i nterpret the porti on of
the bi l l pai d after del i very as a measure of credi t suppl y. Observed
trade credi t i s the outcome of the suppl y of credi t offered to the
customer and the customer s demand for credi t. We focus on
suppl y, but most of our resul ts woul d be unaffected i f the
equati ons were i nterpreted as reduced-form mi xtures of suppl y
and demand factors. Fi rms recei vi ng bank l oans mi ght be gi ven
more credi t by suppl i ers ei ther because the bank l oan i s a si gnal of
credi tworthi ness (a suppl y factor) or because they have a greater
need for credi t (a demand factor). But a customer s demand for
credi t shoul d not be affected by the amount of knowl edge hi s
suppl i er has about hi m or the avai l abi l i ty of al ternati ve suppl i ers.
The sur vey contai ns i nfor mati on on 518 manufactur er-
customer rel ati onshi ps and 518 manufacturer-suppl i er rel ati on-
shi ps. Forty-si x percent of the suppl i ers and 40 percent of the
customers are state-owned enterpri ses. El i mi nati ng these and
rel ati onshi ps no l onger ongoi ng l eaves a sampl e of 242 customer
rel ati onshi ps and 254 suppl i er rel ati onshi ps. Compl ete data are
avai l abl e for 224 customer and 243 suppl i er rel ati onshi ps.
8
V. EMPI RI CAL MEASURES
I n the next secti on we exami ne the determi nants of the
surveyed rms wi l l i ngness to offer credi t to thei r customers. We
run regressi ons wi th the dependent vari abl e bei ng the proporti on
of the payment made after del i very of the goods. We use three sets
of i ndependent vari abl es suggested by the theory (as wel l as a set
of control vari abl es suggested by the trade-credi t l i terature, as
di scussed above). The means of the dependent and i ndependent
vari abl es are shown i n Tabl e I I .
The rst set of vari abl es represents the ease wi th whi ch a
customer can nd an al ternati ve suppl i er. The predi cti on i s that,
when a customer can nd an al ternati ve suppl i er more easi l y, i t
wi l l recei ve l ess trade credi t. We proxy thi s wi th two vari abl es.
Fi rst, the survey asked how many other producers of si mi l ar
products were l ocated wi thi n one ki l ometer of the respondent
rm. Al most two-thi rds of the rms i ndi cated there was at l east
8. The rel ati onshi ps do not represent a random sampl e of al l the rms
tradi ng partners. The l ongest runni ng rel ati onshi ps, i n parti cul ar, are al most
certai nl y more successful than average rel ati onshi ps.
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TABLE I I
CUSTOMER CREDI T VARI ABLE MEANS
Al l
rms
Domesti c
customers
Export
customers
50
Empl oyees
50
Empl oyees
Number of observati ons 224 153 71 148 76
Avg. %of bi l l pai d after
del i very 38% 39% 37% 35% 44%
%rms w/no payment
after 47% 44% 54% 49% 43%
%rms w/al l pai d after 21% 20% 23% 20% 22%
#si mi l ar manufacturers
l ocated w/i n 1 km 3.4 3.3 3.8 3.6 3.1
Most i mportant competi tor
w/i n 1 km 33% 33% 32% 38% 22%
Durati on of rel ati onshi p
(years) 2.13 2.18 2.02 2.1 2.26
Vi si ted customer before
rst transacti on 46% 47% 42% 44% 49%
Currentl y vi si t wi th cus-
tomer at l east weekl y 23% 29% 10% 29% 12%
Fi rst i nformati on from
other manufacturers 20% 18% 25% 19% 22%
Manager tal ks to other
suppl i ers of customer
at l east monthl y 12% 11% 13% 9% 16%
Fi rst i nformati on from
fami l y members 17% 19% 14% 19% 14%
Manufacturer sets pri ces
by rel ati onshi p w/cust 45% 40% 56% 41% 47%
Customer i s retai l store/
whol esal er 42% 46% 32% 44% 45%
Log age of manufacturer
1 (years) 1.61 1.68 1.48 1.62 1.61
Log si ze of manufacturer
(#of empl oyees) 3.54 3.28 4.11 2.96 4.68
Fi rm recei ves credi t from
bank 21% 17% 31% 18% 38%
Avg. %of bi l l s pai d to two
i denti ed suppl i ers
after del i very 40% 40% 41% 39% 42%
Customer i s forei gn-owned 32% 0% 100% 20% 54%
%of manufacturer s sal es
from l argest product 85% 84% 88% 88% 81%
Manager speaks Chi nese 32% 30% 35% 29% 37%
Customer i s rms rst
customer 41% 39% 45% 41% 42%
Manufacturer l ocated i n
Hanoi 34% 31% 42% 32% 39%
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one si mi l ar manufacturer nearby, and 38 percent sai d there were
three or more such rms. Second, the survey asked where the
respondent rms most i mportant competi tor was l ocated; one-
thi rd sai d thei r mai n ri val was i n the same nei ghborhood. More
manufacturers of si mi l ar goods nearby or an i mportant competi -
tor l ocated i n the same nei ghborhood l ower the customer s costs of
ndi ng and usi ng an al ternati ve suppl i er.
The second set of i ndependent vari abl es measures the i nfor-
mati on the manufacturer gathers di rectl y about i ts customer
through i ts di rect contact wi th the customer. The predi cti on i s
that better i nformati on means more credi t. One source of i nforma-
ti on about the customer s rel i abi l i ty i s di rect experi ence i n tradi ng
wi th the customer. We measure thi s by the durati on of the tradi ng
rel ati onshi p. However, many of the i nterrm rel ati onshi ps i n our
data are new: 42 percent have l asted a year or l ess. Thus,
experi ence i n deal i ng wi th the customer provi des l i ttl e i nforma-
ti on for many of the rms, and other sources of i nformati on
become rel evant. Vi si ts to the customer s factory or store mi ght
provi de i nformati on about the l evel of the customer s rel i abi l i ty.
Forty-si x percent of our respondents sai d they vi si ted the custom-
er s faci l i ty at l east once before the busi ness rel ati onshi p started.
Al so, we asked the manufacturers how frequentl y they vi si t wi th
the i denti ed customers currentl y. I n 23 percent of the rel ati on-
shi ps the manufacturers sai d they vi si t at l east weekl y.
9
The thi rd set of i ndependent vari abl es represents member-
shi p i n busi ness or soci al networks. As di scussed above, these
vari abl es mi ght capture ei ther or both of (a) i nformati on about the
customer s rel i abi l i ty and (b) the possi bi l i ty of usi ng communi ty
sancti ons agai nst the customer. The predi cti on i s that, for ei ther
of these reasons, more credi t i s granted when the rm bel ongs to a
network. Fi rst, managers were asked how they rst l earned about
the customer before begi nni ng trade wi th i t. The categori es, wi th
the percentage of rms i ndi cati ng the gi ven response i n parenthe-
ses, were no i nformati on (21 percent), other si mi l ar producers (11
percent), other suppl i ers (10 percent), busi ness associ ati ons (4
percent), government (2 percent), own research (51 percent),
former empl oyer (2 percent), fami l y (17 percent), and other (11
percent). (The responses sum to more than 100 percent because
many rms i ndi cated more than one i nformati on source.) We use
9. Thi s response i ndi cates ei ther a vi si t by the respondent to the customer s
faci l i ty or a vi si t by the customer to the respondents factory.
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these responses to create vari abl es i ndi cati ng i nformati on ob-
tai ned from soci al or busi ness networks. Other si mi l ar produc-
ers, other suppl i ers, and busi ness associ ati ons are combi ned
as busi ness networks, and fami l y i ndi cates fami l y networks.
Second, the survey al so asks whether the customer was managed
by a fami l y member or fri end at the ti me of the rst transacti on.
Thi s i s a broader measure of soci al networks, i ncl udi ng fri ends as
wel l as fami l y. I t i s al so arguabl y a stronger measure, i n that the
fami l y member or fri end manages the customer rather than just
provi di ng i nformati on about the customer. Thi rd, the respondents
were asked how frequentl y they tal k to other suppl i ers of the
particular customer. Talking to other suppliers not only potentially
generates information about the customer s reliability, but also allows
stronger sanctions against any customer that fails topay its debts: the
punishment for failure topay might bring a blacklisting from the other
manufacturers. Twel ve percent of manufacturers tal k wi th other
suppl i ers of the customer at l east monthl y.
The network vari abl es, as noted, coul d represent ei ther the
i nformati on about the rel i abi l i ty of tradi ng partners that the rm
coul d get by tal ki ng wi th other manufacturers or the abi l i ty to
damage the reputati on of a customer that fai l s to pay i ts debt. I s i t
possi bl e to separate i nformati on from sancti ons? I nformati on
about the rel i abi l i ty of a customer i s most val uabl e at the
begi nni ng of a rel ati onshi p. The abi l i ty to sancti on a tradi ng
partner has more enduri ng effects. Thus, where the i nformati on
component i s i mportant, the effects of busi ness and soci al net-
works shoul d di mi ni sh as tradi ng rel ati onshi ps age; where sanc-
ti ons are i mportant, the network effects shoul d endure. We shal l
test thi s by i nteracti ng the three network vari abl esi nformati on
from manufacturers, i nformati on from fami l y, and tal ki ng wi th
suppl i erswi th the durati on of the rel ati onshi p.
Table I I I summarizes the predicted signs of the effects of these
three sets of variables on the amount of trade credi t granted.
VI . CREDI T TO CUSTOMERS
I n thi s secti on we exami ne the determi nants of the surveyed
rms wi l l i ngness to offer credi t to thei r customers. An average of
38 percent of the goods are pai d for after del i very. But i n 47
percent of the cases, no porti on of the amount due i s pai d after
del i very; i n 21 percent the enti re bi l l i s pai d after del i very. The
l evel of credi t i s treated as a censored vari abl e, wi th the desi red
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l evel of credi t observed onl y when i t fal l s between zero and 100
percent. For val ues bel ow zero, we observe zero; for val ues above
100 percent, we observe 100 percent. Denoti ng the desi red l evel of
trade credi t offered to customer i as TC*
i
,
TC*
i
X
i
Z
i
I nd
i

i
,
where X
i
i s a vector of i ndependent vari abl es (as di scussed i n the
previ ous secti on), Z
i
a vector of vari abl es measuri ng other factors
affecti ng credi t, I nd
i
a vector of i ndustry dummi es, and E(
i
) 0.
Gi ven censori ng, the observed l evel of trade credi t offered cus-
tomer i i s
TC
i
TC*
i
for 0 TC*
i
1
TC
i
0 for TC*
i
0, and
TC
i
1 for TC*
i
0.
Thi s i s a standard tobi t model wi th two-si ded censori ng. To ai d the
economi c i nterpretati on of the resul ts, we report i n Tabl e I V the
margi nal effects of a change i n the i ndependent vari abl e i n the
uncensored range.
10
10. McDonal d and Moffi t [1980] show that a tobi t coeffi ci ent can be decom-
posed i nto two parts: the margi nal effect of the i ndependent vari abl e i n the
uncensored range pl us the change i n the probabi l i ty of bei ng censored. The
coeffi ci ents on Tabl es I V, V, VI I , and VI I I represent the rst part of thi s
decomposi ti on. The tobi t coeffi ci ents can be recovered by di vi di ng the coeffi ci ent
shown by the percentage of the sampl e that i s uncensored, shown at the bottom of
each tabl e.
TABLE I I I
DETERMI NANTS OF TRADE CREDI T
Vari abl e Predi cted si gn
Customer l ock-i n
Number of si mi l ar manufacturers wi thi n 1 km
Most i mportant competi tor wi thi n 1 km
Manufacturer i nformati on
Durati on of rel ati onshi p
Vi si ted customer before rst sal e
Currentl y vi si ts customer at l east weekl y
Network membershi p
Fi rst i nformati on from other manufacturers
Fi rst i nformati on from fami l y member
Tal k to other suppl i ers of customer at l east monthl y
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TABLE I V
CUSTOMER CREDI T TOBI TS
PERCENT OF BI LL PAI D BY CUSTOMER AFTER DELI VERY
(1) (2) (3) (4)
(5)
Domestic
(6)
Foreign
(7)
Big
(8)
Small
Customer lock-in:
#similar manufac-
turers 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-
petitor 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:
Duration 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 customer
before rst 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 cust
at 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 information
from other manu-
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 to other sup-
pliers of customer
at 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 information
from family
member
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/customer
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 retail
store/wholesaler
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 rm 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)
Manufacturer
receives credit
from 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 after
delivery (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)
I ndustry controls Yes Yes Yes Yes Yes Yes Yes Yes
Manager controls 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
Regressi on are two-tai l ed Tobi ts. Coeffi ci ents are margi nal effects, t-val ues are i n parentheses.
a. Al l regressi ons i ncl ude i ndustry dummi es (8), and i ndi cators of rst customer and l ocati on i n Hanoi .
b. Regressi on 4 al so i ncl udes % sal es represented by mai n product, manager speaks Chi nese, % sal es to
SOEs, % suppl i es from SOEs, 100% fami l y-owned, col l ecti ve, manager formerl y worked for SOE, age of
manager, and manager attended uni versi ty.
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The regressi on reported i n the rst col umn of Tabl e I V uses
onl y the i ndependent vari abl es rel ated to rel ati onal contracti ng.
The remai ni ng regressi ons i n Tabl e I V check the robustness of
these resul ts, by addi ng vari abl es suggested by the trade-credi t
l i terature as wel l as control s rel ated to manufacturer and man-
ager characteri sti cs. Al l of the regressi ons i ncl ude dummy vari -
abl es control l i ng for (a) the rms i ndustry, (b) whether the
customer i s the ol dest or the most recent of the rms ongoi ng
customers, and (c) the respondents l ocati on (Hanoi or Ho Chi
Mi nh Ci ty).
A. BasicRegressions
The rst set of vari abl es represents the ease wi th whi ch a
customer can nd an al ternati ve suppl i er. The predi cti on i s that,
when a customer can nd an al ternati ve suppl i er more easi l y, l ess
trade credi t wi l l be granted. As di scussed above, we proxy thi s
wi th two vari abl es: the number of other producers of si mi l ar
products l ocated wi thi n one ki l ometer of the respondent rm, and
where the respondent rms most i mportant competi tor was
l ocated. The tobi ts i ndi cate that each addi ti onal nearby manufac-
turer resul ts i n al most 1 percent l ess of the bi l l bei ng pai d after
del i very ( 0.007, t 1.66). Where the mai n competi tor i s
nearby, the porti on of the bi l l pai d after del i very fal l s by thi rteen
percentage poi nts (t 2.46). Thus, customers who can more easi l y
l ocate an al ternati ve suppl i er to the surveyed rm do recei ve l ess
credi t.
11
The second set of i ndependent vari abl es measures the qual i ty
of i nformati on our manufacturers have di rectl y about thei r custom-
ers. The predi cti on i s that better i nformati on means more credi t.
We nd that a l onger durati on of a tradi ng rel ati onshi p i s
si gni cantl y associ ated wi th l arger credi t, at a rate that di mi n-
i shes wi th ti me. The l evel of credi t i ncreases by 7 percent i n the
rst year of a tradi ng rel ati onshi p. After a durati on of two years
(the mean durati on), the amount of credi t offered i s fourteen
percentage poi nts hi gher than new rel ati onshi ps.
12
A l i kel i hood-
11. A more di rect measure of the customer s al ternati ve comes from aski ng
the manufacturers for thei r esti mate of how l ong i t woul d take the customer to nd
an al ternati ve suppl i er. Thi s vari abl e i s avai l abl e for a subset of the sampl e, 195 of
the observati ons. Customers taki ng l onger than a week to nd a new suppl i er are
more l i kel y to get credi t. I n unreported regressi ons avai l abl e from the authors, the
vari abl e i s si gni cant at the .10 l evel .
12. Al l but two rel ati onshi ps have durati ons of seven years or l ess. The two
excepti ons have durati ons of 15 and 23 years. Whi l e we have no reason to excl ude
these observati ons, they do have a l arge effect on the esti mated tenure effects. I f
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rati o test shows that the durati on vari abl es are joi ntl y si gni cant
(
2
11.54, p-val ue .01).
The thi rd set of i ndependent vari abl es represents busi ness
and soci al networks. Busi ness networks appear to support trade
credi t. Where rst i nformati on about the customer comes from
other manufacturers, twenty percentage poi nts more of the bi l l i s
pai d after del i very; thi s i s stati sti cal l y si gni cant at the 1 percent
l evel i n the regressi on reported i n col umn (1). We nd no
si gni cant rel ati onshi p, however, between getti ng i nformati on
from fami l y members and granti ng credi t ( 0.04, t 0.60).
13
Thi s i nsi gni cant i nteracti on i s robust to the broader measure of
soci al networks, i ncl udi ng fri ends as wel l as fami l y, di scussed
above ( 0.05, t 0.69, resul ts not shown on tabl e).
We next consi der three vari abl es measuri ng expl i ci t efforts to
gather i nformati on about a customer. We excl uded these vari abl es
from the rst regressi on because such efforts may be endogenous
to the credi t deci si on. Manufacturers provi di ng credi t to a cus-
tomer have a greater i ncenti ve to gather i nformati on about that
customer. These extra vari abl es cause l i ttl e change i n the si gni -
cance of the effects di scussed above (see col umn (2)).
14
The rst of
these vari abl es i s the frequency wi th whi ch the manufacturer
tal ks to other suppl i ers of the parti cul ar customer. The 12 percent
of manufacturers who tal k wi th other suppl i ers of the customer at
l east monthl y grant thei r customers ni neteen percentage poi nts
more credi t (t 2.36). The second vari abl e i s vi si ts to the custom-
er s factory or store before begi nni ng the tradi ng rel ati onshi p.
Vi si ti ng the customer s faci l i ty before the rst transacti on i s al so
posi ti vel y associ ated wi th del ayed payment, al though the effect of
pri or vi si ts fal l s bel ow the .10 si gni cance l evel i n col umn (2)
( 0.08, t 1.63). The thi rd such vari abl e i s the frequency of
they are excl uded from the data, the coeffi ci ents on durati on and durati on squared
are 0.13 and 0.016, respecti vel y. Esti mated credi t duri ng the rst two years of
the rel ati onshi p i ncreases from fourteen to twenty percentage poi nts. Excl usi on of
these two observati ons has a negl i gi bl e effect on the other esti mated coeffi ci ents.
13. Because the categori es are not mutual l y excl usi ve, there i s no base group.
However, we ran al l of the regressi ons wi th dummi es for own researchand other
sources,the l atter compri sed of government,former empl oyer,and other.The
two addi ti onal dummy vari abl es had no si gni cant effect on the resul ts. They were
excl uded from the nal speci cati ons to si mpl i fy the exposi ti on.
14. Endogenei ty i s arguabl y l ess of a probl em for the vari abl es i n col umn (1).
The deci si on to gi ve credi t cannot be made before the factory i s establ i shed and the
customer i s i denti ed. However, i f rel ati onshi ps wi th hi gher i ni ti al l evel s of trust
have l onger durati on, then our durati on vari abl e may be bi ased upward. Our data
set does not contai n any obvi ous i nstruments for rel ati onshi p durati on. For a
di scussi on of a comparabl e probl em wi th job tenure i n work rel ati onshi ps, see
Al tonji and Wi l l i ams [1997].
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vi si ts wi th the i denti ed customers currentl y. Ongoi ng vi si ts have
a ver y smal l negati ve associ ati on wi th cr edi t ( 0.03,
t 0.46).
15
B. Robustness Checks
The foregoi ng resul ts are consi stent wi th a story of coopera-
ti ve rel ati onshi ps sustai ned by market fri cti ons. The remai ni ng
regressi ons i n Tabl e I V exami ne the robustness of these resul ts.
Col umn (3) adds vari abl es suggested by the l i terature on trade
credi t (these are di scussed i n more detai l i n Secti on VI I I bel ow).
Col umn (4) adds further control s rel ated to manufacturer and
manager characteri sti cs. These addi ti onal vari abl es have l i ttl e
effect on the rel ati onal -contracti ng coeffi ci ents. Col umns (5) to (8)
break the sampl e i nto domesti c and forei gn customers and l arge
and smal l manufacturers; as di scussed bel ow, rms wi th forei gn
customers show some di fferent patterns i n granti ng credi t than
rms wi th domesti c customers, and l arger rms behave di ffer-
entl y from smal l er rms.
Manufacturers may be unabl e to grant trade credi t i f they are
nanci al l y constrai ned. We consi der the effect of bank l oans and
credi t from customers. Those who currentl y recei ve credi t from
banks are l ess l i kel y to be constrai ned, but we nd no effect of the
l oans on the propensi ty to grant credi t ( 0.02, t 0.36).
However, recei vi ng credi t from suppl i ers si gni cantl y i ncreases
the l i kel i hood of offeri ng credi t to customers. Our measure of thi s
i s the average percentage of bi l l s pai d to the two suppl i ers
i denti ed i n the survey after del i very of i nputs, rangi ng from zero
to one. Fi rms payi ng the sampl e mean of 40 percent of thei r suppl y
bi l l s after del i very gi ve 16 percent more credi t to thei r customers
than rms who pay for none of thei r suppl i es after del i very. Thi s
proxy for credi t from suppl i ers i s cl earl y i mperfect, si nce we do not
know how i mportant these suppl i ers are beyond that they each
represent at l east 3 percent of the rms procurement bi l l . We
suspect that the posi ti ve associ ati on between recei vi ng credi t
from suppl i ers and granti ng credi t to customers i s al so proxyi ng
for di fferences i n credi t practi ces i n di fferent product l i nes.
Gi ven the heterogenei ty of the sampl e, control l i ng for i ndus-
15. Frequent vi si ts may si mpl y reect frequent del i veri es of goods. For
exampl e, 16 of the 35 rms produci ng food products (46 percent) vi si t thei r
customers at l east once a weekdoubl e the sampl e mean. Thi s probabl y reects
the peri shabl e nature of the products, rather than expl i ci t i nformati on gatheri ng.
Neverthel ess, i f i mportant i nformati on i s gathered i n the course of del i very, we
shoul d expect to nd that these manufacturers are more wi l l i ng to grant credi t.
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try norms i s i mportant. For exampl e, tal ki ng wi th other suppl i ers
of customers mi ght be common among garment producers, where
credi t al so happens to be rel ati vel y more common. I f so, then the
posi ti ve coeffi ci ent on tal ki ng to suppl i ers may be spuri ous. We
bel i eve that we have adequatel y control l ed for thi s heterogenei ty.
Fi rst, al l of the equati ons i ncl ude ei ght i ndustry dummy vari -
abl es. (Thei r coeffi ci ents are shown i n Appendi x 1.) Second, the
i ncl usi on of the vari abl e measuri ng credi t from suppl i ers provi des
an addi ti onal control for the l evel of credi t granted i n manufactur-
er s product l i ne. Thi rd, the correl ati ons between the i ndustry
dummi es and the rel ati onal -contracti ng vari abl es (shown i n
Appendi x 2) are as bi g as 0.15 i n onl y 6 of 72 cases. Moreover, i n
seven of the ni ne i ndustri es, the correl ati on between the i ndustry
dummy and tal ki ng to suppl i ers i s opposi te i n si gn to the
correl ati on between the i ndustry dummy and i nformati on from
manufacturers.
As a further check on the robustness of the resul ts, we added
(i n col umn (4)) several rm and manager characteri sti cs, as
descri bed i n the notes to Tabl e I V. About 10 percent of the sampl e
i s l ost because of nonresponses to questi ons rel ated to manager
characteri sti cs.
16
I n thi s regressi on the vari abl e representi ng
i nformati on from fami l y members i s negati ve and si gni cant at
the .10 l evel ( 0.13, t 2.11).
17
I ncl usi on of these control s
has l i ttl e effect on the other rel ati onal -contracti ng vari abl es.
Among the control s added to col umn (4), we i ncl ude a vari abl e
i ndi cati ng whether the manager speaks Chi nese to test for ethni c
network effects; we found noeffect ( 0.02, t 0.36, not shown).
18
The fourth regressi on al so tests for effects of membershi p i n trade
associ ati ons. I n 35 percent of the rel ati onshi ps i n the sampl e, the
manufacturer bel ongs to a trade associ ati on. The trade associ a-
ti ons to whi ch 9 percent of the sampl e manufacturers bel ong
provi de i nformati on on the rel i abi l i ty of tradi ng partners or
16. The nonresponses are to questi ons on educati on (16), Chi nese l anguage
abi l i ty (7), and work i n a state-owned enterpri se (2). The changes i n the coeffi ci ents
between col umns (3) and (4) do not appear to be the resul t of the change i n sampl e.
When the col umn (3) speci cati on i s run on the reduced col umn (4) sampl e, the
coeffi ci ents are si mi l ar to those i n col umn (3).
17. When the al ternati ve measure of soci al networks, the customer i s
managed by a fami l y member or fri end, repl aces i nformati on from fami l y
members, i ts coeffi ci ent i s essenti al l y zero ( 0.004, t 0.07).
18. I n precommuni st Vi etnam, accordi ng to Barton [1983], i nterrm net-
works were a speci cal l y ethni c-Chi nese phenomenon; the ethni c-Vi etnamese
merchants were unabl e to establ i sh trust among themsel ves. The l ack of effect of
our Chi nese-l anguage dummy i n the esti mati on equati ons to the contrary sug-
geststhough i t i s not a concl usi ve testthat the present-day rel ati onshi ps may
not be shaped by ethni c ti es.
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arbi trati on servi ces. We nd no evi dence that membershi p i n a
trade associ ati on provi di ng these servi ces affects the l evel of
credi t offered customers ( 0.02, t 0.29, not shown).
The rel ati onal -contracti ng vari abl es, therefore, are general l y
robust to the i ncl usi on of addi ti onal control s. I nformati on from
fami l y members i s the onl y measure that changes si gn or si gni -
cance, becomi ng si gni cantl y negati ve i n the fourth speci cati on.
The esti mated margi nal effect of other vari abl es changes some-
what wi th the speci cati on, but fewer si mi l ar rms nearby, l onger
rel ati onshi p durati ons, and i nformati on from busi ness networks
are al l consi stentl y associ ated wi th hi gher l evel s of credi t.
Col umns (5) through (8) of Tabl e I V exami ne whether these
determi nants of the wi l l i ngness to offer credi t vary dependi ng on
whether the manufacturi ng i s sel l i ng domesti cal l y or overseas, or
whether the manufacturer i s l arge or smal l . One-thi rd of the
customers i n the data are forei gn-owned.
19
The determi nants of
credi t i n export rel ati onshi ps may di ffer from those i n domesti c
rel ati onshi ps. Tradi ng compani es and other mi ddl emen may pl ay
a bi gger rol e i n exporti ng, and subcontracti ng arrangements may
be more common. The fth and si xth col umns spl i t the sampl e i nto
domesti c and forei gn customers. The most di rect communi ty
sancti onstal ki ng to other suppl i ers of the customeri s i mpor-
tant onl y for domesti c customers ( 0.27, t 3.18); there i s no
associ ati on between l ocal gossi p and gi vi ng credi t to forei gn
customers ( 0.04, t 0.26). Si mi l arl y, vi si ts before the rst
transacti on has a si gni cant effect onl y for domesti c customers.
However, forei gn tradi ng partners recei ve 22 percentage poi nts
more credi t i f the i ni ti al contact came through manufacturers of
si mi l ar goods, an effect that i s smal l er and i nsi gni cant when the
customer i s a domesti c rm ( 0.06, t 1.00). The measures of
the durati on of the rel ati onshi p retai n thei r si gn but l ose thei r
si gni cance for forei gn customers.
Smal l rms mi ght be expected to rel y more than l arge rms
on communi ty sancti ons to support credi t rel ati onshi ps. Bi l ateral
sancti ons are a more powerful threat comi ng from l arger rms.
Moreover, l arger rms are more l i kel y to have al ternati ve means
of enforci ng contracts: for exampl e, 12 percent of rms wi th more
than 50 empl oyees and onl y 5 percent of rms wi th 50 or fewer
empl oyees sai d there i s a thi rd party that can enforce contracts
19. Of the 71 export customers i n the sampl e, 11 are descri bed as bei ng
l ocated i n the same ci ty as the respondent. These may represent ei ther l ocal
buyi ng offi ces for export customers or l ocal operati ons of forei gn compani es.
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wi th thei r customers (t 1.26). Col umns (7) and (8) report tobi ts
for credi t gi ven by rms wi th more than 50 workers and rms wi th
50 or fewer workers, respecti vel y.
20
For smal l rms, credi t i s
si gni cantl y associ ated wi th tal ki ng regul arl y wi th other suppl i -
ers of the customers ( 0.31, t 3.20). Al though l arge rms are
more l i kel y to tal k regul arl y wi th other suppl i ers of thei r custom-
ers (Tabl e I I ), there i s no associ ati on between doi ng so and
granti ng credi t for l arge rms ( 0.19, t 1.31). Vi si ti ng the
customer s faci l i ty before the rst sal e i s associ ated wi th hi gher
l evel s of credi t among smal l rms but not l arge rms. Large rms
gi ve twenty percentage poi nts more credi t to customers that are
retai l stores or whol esal ers. Thi s suggests that the recovery/resel l
opti on may be i mportant for l arger rms, si nce retai l stores are
l ess l i kel y to have transformed the merchandi se than customers
that buy the goods for use as i nputs. Fi nal l y, l arge rms gi ve
fourteen percentage poi nts more credi t i n rel ati onshi ps where
pri ces are determi ned by the rel ati onshi p wi th the customer,
thi s resul t i s consi stent wi th l arge rms usi ng credi t to pri ce-
di scri mi nate. The consi stent pattern of these resul ts, then, i s that
l arge rms tend to fol l ow i ndustri al -organi zati on rati onal es for
granti ng credi t; and smal l rms rel y more heavi l y than l arge
rms on communi ty-based i nformati on and enforcement.
C. I nteraction Effects
Network membershi p provi des a manufacturer both i nforma-
ti on about the rel i abi l i ty of tradi ng partners and the abi l i ty to
damage the reputati on of a customer that fai l s to pay i ts debt. We
now try to separate i nformati on from sancti ons, by noti ng that
i nformati on about the rel i abi l i ty of a customer i s most val uabl e at
the begi nni ng of a rel ati onshi p, whereas the abi l i ty to sancti on a
tradi ng partner has more enduri ng effects. We test thi s by
i nteracti ng the three network vari abl esi nformati on from manu-
facturers, i nformati on from fami l y, and tal ki ng wi th suppl i ers
wi th the durati on of the rel ati onshi p and i ts square.
The resul ts, shown i n Tabl e V, suggest that sancti ons are a
component of the three network vari abl es. The tabl e shows the
esti mated cumul ati ve effect of each of the three network vari abl es
for the rst four years of rel ati onshi p. More than 90 percent of the
rel ati onshi ps i n the sampl e have a durati on of four years or l ess,
20. Whi l e there i s a posi ti ve correl ati on between bei ng bi g and havi ng export
cl i ents, 42 percent of exporters have 50 or fewer empl oyees, and al most hal f of the
customers of bi g rms are domesti c.
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and 79 percent have durati ons of three years or l ess. The effect of
getti ng i ni ti al i nformati on about the customer from another
manufacturer grows sl i ghtl y over ti me (from ei ght percentage
poi nts i n year 1 to thi rteen percentage poi nts i n year 4); the effect
of tal ki ng regul arl y wi th suppl i ers i ncreases i n the rst two years,
and then fal l s. The effect of getti ng i ni ti al i nformati on about the
customer from a fami l y member, whi ch i s negati ve from the start,
becomes more so i ni ti al l y before reboundi ng. The
2
tests i ndi cate
that the addi ti onal vari abl es are joi ntl y si gni cant i n none of the
rst three equati ons, i ndi cati ng that the ti me-i ndependent vari -
abl es adequatel y expl ai n the data. We i nterpret these resul ts as
i ndi cati ng that sancti ons are a si gni cant rol e of the busi ness
networks.
We al so i nteract the bi l ateral i nformati on vari abl esvi si ti ng
wi th the customer before and duri ng the rel ati onshi pwi th the
TABLE V
CUSTOMER CREDI T, TI ME-DEPENDENT I NFORMATI ON VARI ABLES
I nformati on
from
manufacturers
Tal k
monthl y
wi th
suppl i ers
of
customer
I nformati on
from
fami l y
Vi si ted
customer
before
rst
sal e
Vi si t
customer
at l east
weekl y
I nformati on 0.09 0.08 0.03 0.17 0.25
(0.85) (0.58) (0.24) (2.25) (2.28)
I nformati on
durati on
0.004
(0.05)
0.19
(1.50)
0.07
(1.08)
0.08
(1.35)
0.22
(2.29)
I nformati on
durati on
squared
0.004
(0.20)
0.04
(1.84)
0.01
(1.68)
0.01
(0.82)
0.04
(2.18)
2
(2 df) 0.25 4.43 3.36 2.52 5.51
p-val ue 0.88 0.11 0.19 0.28 0.06
Effect of i nfor-
mati on on
credi t:
durati on 1
year
0.08 0.23 0.08 0.10 0.07
durati on 2
years
0.09 0.30 0.12 0.05 0.03
durati on 3
years
0.11 0.28 0.12 0.01 0.06
durati on 4
years
0.13 0.19 0.10 0.00 0.01
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rel ati onshi p durati on. Unl i ke wi th the network vari abl es, the
i mpact of vi si ts before the rst sal e does di mi ni sh over ti me. Pri or
vi si ts i s associ ated wi th customers payi ng ten percentage poi nts
more of thei r bi l l after del i very one year i nto the rel ati onshi p, but
onl y one percentage poi nt more after three years. The di sappear-
ance of the effect of vi si ts pri or to the start of the rel ati onshi p
suggests that these vi si ts provi de i nformati on rather than an
abi l i ty to sancti on. Note that the vari abl e i ndi cati ng vi si ts has a
hi gher l evel of si gni cance when the i nteracti on terms are
i ncl uded (compare Tabl e I V, col umn (3) wi th Tabl e V, col umn (4)).
The ti me-dependent pattern of ongoi ng vi si ts i s more di ffi cul t to
i nterpret. The effect of ongoi ng vi si ts rst i ncreases and then
decreases, hoveri ng on ei ther si de of zero. The ti me durati on-
i nteracti on terms are joi ntl y si gni cant i n the ongoi ng-vi si ts
equati on.
D. Summaryof Customer-Credit Results
The data show that a rm offers more trade credi t to i ts
customers when there are fewer rms si mi l ar to i t nearby. I f a
rms mai n competi tor i s l ocated nearby, the credi t the rm grants
i s about fteen percentage poi nts l ower. The durati on of the
rel ati onshi p affects trade credi t: after two years, the amount of
credi t offered i s fourteen percentage poi nts hi gher than wi th a
new rel ati onshi p. Busi ness networks have a si gni cant effect.
Trade credi t i s ten to twenty percentage poi nts hi gher for a
customer i ni ti al l y contacted through a busi ness network; a rm
that communi cates wi th i ts customer s other suppl i ers on a
conti nui ng basi s grants i ts customers about twenty percentage
poi nts more credi t. Vi si ts to the customer s factory or store pri or to
the rst transacti on are associ ated wi th around ten percentage
poi nts more credi t, the effect bei ng more si gni cant for domesti c
customers and among smal l rms. Some of the i nteracti ons
predi cted by the theory are i nsi gni cant i n the data: vi si ti ng the
customer on an ongoi ng basi s and bel ongi ng to a soci al network
are not si gni cantl y rel ated to trade credi t.
VI I . CREDI T FROM SUPPLI ERS
A. BasicRegressions
Our survey al so contai ns data on trade credi t recei ved by the
i ntervi ewed manufacturers from thei r l ongest conti nui ng suppl i er
and thei r newest suppl i er. Trade credi t recei ved from suppl i ers i s
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si mi l ar i n magni tude to that granted to customers. The respon-
dents pay an average of 45 percent of thei r bi l l s after goods are
del i vered (see Tabl e VI ). I n the regressi ons reported i n Tabl e VI I ,
we expl ore how the avai l abi l i ty to the manufacturer of al ternati ve
suppl i ers and the i nformati on avai l abl e to the suppl i er affect the
credi t the manufacturer recei ves from the suppl i er. The theoreti -
cal framework used here i s the same as i n the precedi ng secti on.
However, we do not have exactl y the same data, si nce our survey
was answered by just one of the parti es to the rel ati onshi p: the
suppl i er i n the previ ous secti ons regressi ons and the customer i s
thi s secti ons. As a resul t, the i ndependent vari abl es i n Tabl e VI I
are not the same as those i n Tabl e I V. Neverthel ess, they are
si mi l ar enough to provi de a further check on the robustness of the
customer-credi t resul ts.
Data on the manufacturer s degree of l ock-i n to i ts suppl i er
are provi ded by a questi on on how l ong i t woul d take them to nd
al ternati ve suppl i es i n the event a suppl i er fai l ed to del i ver goods
as promi sed. One-quarter of the respondents sai d i t woul d take
TABLE VI
SUPPLI ER CREDI T, VARI ABLE MEANS
Al l
rms
Domesti c
suppl i ers
I mport
suppl i ers
Number of observati ons 243 195 47
Avg. %of bi l l pai d after del i very 45% 42% 57%
%of cases w/no payment after 43% 47% 28%
%of cases w/al l pai d after 30% 29% 36%
1 day to nd al ternati ve suppl i er 25% 29% 9%
1 week to nd al ternati ve suppl i er 38% 31% 66%
Currentl y have no al ternati ve suppl i er 22% 13% 57%
Durati on of rel ati onshi p (years) 2.58 2.68 2.11
Vi si ted suppl i er before rst purchase 65% 70% 45%
Currentl y vi si t w/suppl i er at l east weekl y 33% 37% 17%
Manufacturer currentl y has bank credi t 21% 20% 28%
Suppl i er i s managed by fami l y member/fri end 21% 23% 13%
I f manufacturer cheated suppl i er, other
suppl i ers nd out (012) 1.22 1.24 1.17
%sal es mai n product 84% 85% 82%
Log age of manufacturer 1 (years) 1.73 1.78 1.53
Log si ze of manufacturer (#of empl oyees) 3.37 3.28 3.72
Manager speaks Chi nese 24% 22% 32%
Suppl i er i s ol dest conti nui ng 49% 48% 55%
Manufacturer i s l ocated i n Hanoi 42% 49% 10%
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TABLE VI I
SUPPLI ER CREDI T TOBI TS
PERCENT OF BI LL PAI D TO SUPPLI ER AFTER DELI VERY
(1) (2) (3) (4) (5)
(6)
Domesti c
Manufacturer l ock-i n:
Less than 1 day to nd
al ternati ve suppl i er
0.11
(1.67)
0.12
(1.74)
0.11
(1.62)
0.15
(2.12)
0.08
(1.11)
More than 1 week to
nd al ternati ve
suppl i er
0.004
(0.07)
0.001
(0.02)
0.002
(0.03)
0.010
(0.17)
0.031
(0.44)
Currentl y have an
al ternati ve suppl i er
0.07
(1.12)
Suppl i er i nformati on:
Durati on of rel ati on-
shi p (years)
0.03
(1.44)
0.02
(0.92)
0.02
(0.87)
0.03
(1.36)
0.05
(1.95)
0.03
(1.28)
Durati on

2 0.0016
(1.62)
0.0013
(1.37)
0.0012
(1.28)
0.0014
(1.54)
0.0021
(1.94)
0.0014
(1.49)
Vi si ted suppl i er before
rst purchase
0.07
(1.19)
0.09
(1.51)
0.07
(1.34)
0.03
(0.62)
0.14
(2.11)
Currentl y vi si t suppl i er
at l east weekl y
0.003
(0.06)
0.02
(0.31)
0.02
(0.39)
0.01
(0.26)
0.03
(0.56)
Manufacturer currentl y
has bank credi t
0.26
(3.79)
0.23
(3.56)
0.22
(3.46)
0.24
(3.60)
0.20
(2.95)
0.19
(2.51)
Network membershi p:
Suppl i er i s managed by
fami l y or fri end
0.11
(1.70)
0.12
(1.89)
0.12
(1.79)
0.10
(1.48)
0.09
(1.27)
0.08
(1.16)
I f manufacturer
cheated suppl i er,
other suppl i ers nd
out
0.14
(3.19)
0.13
(3.03)
0.13
(3.09)
0.17
(3.77)
0.10
(2.27)
Al ternati ve expl anati ons:
%sal es mai n product 0.39
(3.23)
0.49
(3.72)
0.33
(2.32)
Log rm age 1
(years)
0.06
(1.13)
0.05
(0.75)
0.06
(1.01)
Log empl oyment 0.06
(2.12)
0.06
(1.96)
0.07
(1.95)
Manager characteri sti cs:
Manager speaks
Chi nese
0.06
(0.84)
I ndustry control s Yes Yes Yes Yes Yes Yes
Manager control s No No No No Yes No
Number of observati ons 243 243 243 243 228 195
%obs uncensored 26.34% 26.34% 26.34% 26.34% 27.19% 24.10%
2
45.0 59.6 56.9 76.1 84.5 48.7
p-val ue 0.001 0.001 0.001 0.001 0.001 0.001
Regressi ons are two-tai l ed Tobi ts. Coeffi ci ents are margi nal effects, t-val ues are i n parentheses.
a. Al l regressi ons i ncl ude i ndustry dummi es (8), and i ndi cators of ol dest suppl i er and l ocati on i n Hanoi .
b. Regressi on 5 al so i ncl udes % sal es to SOEs, % suppl i ers from SOEs, suppl i er l ocated i n same ci ty,
manufacturer col l ecti vel y owned, manufacturer fami l y owned, manager formerl y worked for SOE, age of
manager, manager attended uni versi ty.
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l ess than a day, whi l e 38 percent sai d i t woul d take l onger than
one week (Tabl e VI ). We nd (see Tabl e VI I , col umn (1)) that
manufacturers who can very qui ckl y nd al ternati ve suppl i ers
(i .e., i n l ess than one day) recei ve el even percentage poi nts l ess
credi t from thei r current suppl i ers, an effect si gni cant at the .10
l evel . However, taki ng more than a week to nd an al ternati ve
suppl i er has no effect on the l evel of credi t ( 0.004, t 0.07).
We know l ess about the i nformati on the suppl i er has about
the manufacturer, si nce onl y the l atter was i ntervi ewed; but some
i ndi cati on of the i nformati on i s avai l abl e. As wi th customer credi t,
we nd that rel ati onshi ps of l onger durati on i nvol ve more credi t,
an effect that di mi ni shes across ti me. For suppl i er credi t, how-
ever, the effect i s both smal l er and l ess stati sti cal l y si gni cant
(Tabl e VI I ). Credi t i ncreases three percentage poi nts i n the rst
year of a rel ati onshi p and an addi ti onal two percentage poi nts the
second year. The durati on vari abl es are joi ntl y i nsi gni cant
(
2
3.06, p-val ue .22).
21
A di rect measure of credi tworthi ness i s recei vi ng l oans from
banks. Suppl i ers mi ght get i nformati on by observi ng the manufac-
turers rel ati onshi ps wi th banks. Manufacturers that currentl y
recei ve credi t from banks al so recei ve si gni cantl y more credi t
from suppl i ers than those that do not recei ve bank l oans ( 0.26,
t 3.79).
22
We al so have some data on vi si ts pri or to the rst transacti on
and ongoi ng vi si ts. As wi th customer credi t, the ongoi ng vi si ts
measure the frequency of vi si ts by the suppl i er to the manufactur-
er s factory or from the manufacturer to the suppl i er s factory. The
same caveats appl y as before. The questi on rel ated to vi si ts pri or
to the rst transacti on asks onl y whether the i ntervi ewed manu-
facturer vi si ted the suppl i er s factory. Si nce the suppl i er i s the
party provi di ng credi t here, such a vi si t woul d not provi de any
i ndi cati on of the customer s (that i s, the manufacturer s) l evel of
21. There are two observati ons wi th very l ong durati ons, 23 and 30 years.
When these are excl uded from the sampl e, the durati on moves cl oser to zero
( 0.01, t 0.26), and i ts square swi tches si gn ( 0.001, t 0.23). The
esti mated i ncrease i n credi t i n the rst two years of a rel ati onshi p becomes two
percentage poi nts, wi th an addi ti onal three percentage poi nts i n the thi rd year.
22. Al though the bank l oan vari abl e i s the same as that used i n the customer
credi t equati on, the effect the vari abl e i s measuri ng i s di fferent. Si nce the questi on
rel ates to whether the manufacturer currentl y has a bank l oan, the vari abl e does
not measure l i qui di ty effects i n the suppl i er credi t regressi on. We i nterpret the
data as representi ng the suppl y of credi t, on the presumpti on, as di scussed above,
that rms accept al l the credi t they can get. I f demand factors al so matter, then the
posi ti ve associ ati on between recei vi ng l oans from banks and recei vi ng credi t from
suppl i ers mi ght i ndi cate that the manufacturer has a hi gher demand for credi t.
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i nvestment. We neverthel ess i ncl ude the vari abl e i ndi cati ng pri or
vi si ts because such a vi si t mi ght provi de i nformati on on the
busi ness acumen and other characteri sti cs of the manufacturer.
We nd that ongoi ng vi si ts have no effect on credi t l oans
( 0.003, t 0.06) but vi si ti ng the suppl i er at l east once
before the rst transacti on has a smal l posi ti ve effect on the l evel
of credi t recei ved ( 0.07, t 1.19).
Our measure of soci al networks i s whether the suppl i er was
managed by someone who was a fami l y member or fri end when
the tradi ng rel ati onshi p started. The response to thi s questi on
i ndi cates a two-way soci al rel ati onshi p between the manufacturer
and the suppl i er. Suppl i ers managed by fami l y members or
fri ends al l ow customers to pay el even percentage poi nts more of
thei r bi l l after del i very (t 1.70, Tabl e VI I ).
23
Each manufacturer was asked whether i ts suppl i ers tal ked
among themsel ves. Those who agreed wi th the statement I f I
have a di spute wi th one of my suppl i ers, my other suppl i ers wi l l
surel y nd out about i t recei ve si gni cantl y more credi t from
thei r suppl i ers (the vari abl e i s coded 0 for di sagree, 2 for agree,
and 1 for i ndi fferent). Because of the possi bl e endogenei ty prob-
l ems as wel l as the questi onabl e rel i abi l i ty of responses to
subjecti ve questi ons l i ke thi s, we omi t thi s vari abl e from the
regressi on reported i n col umn (1) of Tabl e VI I . But i ts i ncl usi on i n
col umn (2) has l i ttl e effect on the si ze or si gni cance of the other
vari abl es. I ts si ze and si gni cance suggest that credi t i s supported
by communi ty sancti ons. Manufacturers whose suppl i ers commu-
ni cate recei ve fourteen percentage poi nts more credi t than those
whose suppl i ers do not communi cate (t 3.19).
B. Robustness Checks
The regressi ons i n col umns (3) through (6) of Tabl e VI I
exami ne the robustness of the resul ts i n col umns (1) and (2). The
equati on i n col umn (3) makes just one change, usi ng an al terna-
ti ve manufacturer search-cost vari abl ewhether or not the manu-
facturer has an al ternati ve suppl i er for these i nputs. Havi ng an
al ternati ve suppl i er reduced the provi si on of credi t as expected,
but the coeffi ci ent i s not si gni cant ( 0.07, t 1.12). The
23. As wi th customers, we al so know the manufacturer s rst source of
i nformati on about the suppl i er. But si nce the suppl i er i s taki ng the ri sk i n
granti ng credi t, the rel evant data rel ate to the suppl i er s i nformati on about the
manufacturer. Thi s the survey does not tel l us. Knowi ng that a manufacturer
heard about the suppl i er from a fami l y member does not tel l us anythi ng about the
rel ati onshi p between the suppl i er and the i nformati on source.
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fourth col umn adds three characteri sti cs of the rms: age, si ze,
and the percentage of sal es comi ng from the rms mai n product.
Larger and ol der rms recei ve l ess credi t from thei r suppl i ers,
though onl y the si ze effect i s si gni cant. A ve-year-ol d rm
recei ves seven percentage poi nts l ess credi t than a one-year-ol d
rm, and four percentage poi nts more than a ten-year-ol d rm. A
rm wi th 60 empl oyees pays seven percentage poi nts l ess (four
percentage poi nts more) of i ts bi l l after del i very than a rm wi th
20 (120 empl oyees).
Fi rms wi th sal es concentrated i n one product are subject to
greater ri sks from market uctuati ons, whi ch i s reected i n a
l ower l evel of credi t recei ved from suppl i ers. When the sal es of the
mai n product as a proporti on of total sal es i ncrease by 10 percent,
the credi t offered by suppl i ers fal l s by four percentage poi nts.
Col umn (5) adds other vari abl es measuri ng characteri sti cs of
the manufacturer and i ts manager. Managers who speak Chi nese
recei ve no more credi t. The i ncl usi on of the addi ti onal control s
does have some effect on the rel ati onal contracti ng vari abl es.
Suppl i ers managed by fami l y members or fri ends, our measure of
soci al networks, no l onger gi ve si gni cantl y more credi t than
other suppl i ers. The effect i s sti l l posi ti ve, but drops bel ow the 10
percent threshol d when rm and manager characteri sti cs are
added. The measures of rel ati onshi p durati on, on the other hand,
become si gni cant when the rm and manager characteri sti cs are
added (col umn (5)).
Fi nal l y, as wi th customer credi t, a mi nori ty (20 percent) of the
suppl y rel ati onshi ps are wi th forei gn-owned suppl i ers. I n the l ast
col umn of Tabl e VI I , we consi der the sampl e of domesti c suppl i ers.
Compari ng the resul ts wi th those of col umn (4), where the
speci cati on i s the same, the removal of forei gn suppl i ers from the
sampl e does have some effect. The vari abl e i ndi cati ng suppl i es
that can be repl aced i n a day or l ess ( 0.08, t 1.11) and the
vari abl e i ndi cati ng the suppl i er i s managed by a fami l y member of
fri end ( 0.08, t 1.16) are both sl i ghtl y smal l er i n magni tude
drop bel ow the .10 threshol d of si gni cance. On the other hand,
vi si ts pri or to the rst transacti on are now si gni cantl y associ ated
wi th the l evel of credi t ( 0.14, t 2.11).
24
24. When the three vari abl es whi ch were added to the regressi on i n col umn
(2) are removed from the regressi ons i n col umns (3) through (6), the durati on
vari abl es are si gni cant at the .10 l evel i n col umns (4) and (6), and the
fami l y/fri end vari abl e i s no l onger si gni cant at the .10 l evel i n col umn (3). Apart
from thi s, the excl usi on of these vari abl es does not change the resul ts i n any
si gni cant way.
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As wi th customer credi t we nd that the effects of networks
are enduri ng, suggesti ng that sancti ons are a moti vati on for
communi cati ng wi th the customer s other suppl i ers (see Tabl e
VI I I ). The posi ti ve effect of gossi p on credi t does decl i ne through
ti me, from ei ghteen percentage poi nts after one year to ei ght
percentage poi nts after four years. The i nteracti on terms on
gossi p among suppl i ers are si gni cant (
2
4.60, p-val ue .10).
The durati on-dependent i nteracti ve effects are not si gni cant for
suppl i ers managed by a fami l y member or fri end (
2
0.31,
p-val ue .86). The coeffi ci ents suggest an effect that i ncreases
from ni ne percentage poi nts at the end of one year to ni neteen
percentage poi nts at the end of four years. Thus, both of these
network vari abl es agai n demonstrate durabl e effects.
The ti me-dependent effects of vi si ts wi th suppl i ers are si mi -
l ar to those of vi si ts wi th customers. Ongoi ng vi si ts hovers around
zero, whi l e the effect of vi si ti ng before the rst transacti on i s
agai n transi tory. Pri or vi si ts are associ ated wi th twel ve percent-
age poi nts more credi t after one year of the rel ati onshi p, but no
more credi t after four years.
C. Summaryof Supplier Results
The mai n resul ts for suppl i er credi t are si mi l ar to those for
customer credi t. The manufacturer s di ffi cul ty of l ocati ng al terna-
TABLE VI I I
SUPPLI ER CREDI T, TI ME-DEPENDENT I NFORMATI ON VARI ABLES
Suppl i er
managed
by fami l y/
fri end
Suppl i ers
communi cate
Vi si ted
suppl i er
before rst
purchase
Currentl y
vi si t suppl i er
at l east
weekl y
I nformati on 0.05 0.21 0.16 0.09
(0.39) (2.74) (1.26) (0.82)
I nformati on durati on 0.03
(0.37)
0.02
(0.44)
0.05
(0.78)
0.08
(1.75)
I nformati on durati on
squared
0.001
(0.17)
0.003
(0.83)
0.001
(0.21)
0.003
(1.18)
2
(2 df) 0.26 4.60 2.18 0.36
p-val ue 0.88 0.10 0.34 0.83
Effect of i nformati on on
credi t:
durati on 1 year 0.09 0.18 0.12 0.02
durati on 2 years 0.12 0.16 0.08 0.01
durati on 3 years 0.14 0.12 0.03 0.01
durati on 4 years 0.15 0.08 0.01 0.02
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ti ve sources of suppl y affects credi t, and the l evel of credi t
i ncreases wi th the durati on of the rel ati onshi p (though the
evi dence for these i s weaker on the suppl i er si de than on the
customer si de). Credi t i s l arger when there i s communi cati on
among the suppl i ers, al l owi ng for communi ty sancti ons.
VI I I . COMPARI SON TO THE TRADE-CREDI T LI TERATURE
Our study di ffers from exi sti ng empi ri cal trade-credi t studi es
i n two ways. Fi rst, we add a new expl anatory vari abl e, the
avai l abi l i ty to the customer of al ternati ve suppl i ers, and nd that
i t i s associ ated wi th the credi t the suppl i er grants to that
customer. Second, we exami ne i nterrm rel ati onshi ps i n more
detai l than before. Petersen and Rajan [1997], for exampl e,
expl ore suppl i er-credi tor rel ati onshi ps among smal l U. S. rms,
but thei r data, on the rms aggregate credi t posi ti on, al l ow them
to do so onl y i ndi rectl y. Our data on the credi t offered by a
parti cul ar suppl i er to a parti cul ar customer enabl e us to exami ne
the determi nants of the cooperati veness, as measured by credi t, of
the speci c rel ati onshi p. Neverthel ess, i t i s i nstructi ve to compare
the resul ts for the vari abl es that overl ap.
Trade credi t may be used as a means of achi evi ng covert pri ce
di scri mi nati on. Petersen and Rajan [1997] l ook for pri ce di scri mi -
nati on vi a credi t by aski ng whether a rms prot i s associ ated
wi th gi vi ng credi t; wi th U. S. data they nd a posi ti ve rel ati on-
shi p. Whi l e anti trust pol i cy does not prevent rms i n Vi etnam
from pri ce-di scri mi nati ng, manufacturers mi ght sti l l use credi t to
hi de pri ce cuts from other customers. We do not have data on
prots, but we do nd some evi dence for the use of trade credi t as a
means of pri ce di scri mi nati on. Fi rms i n our survey that set pri ces
by the rel ati onshi p wi th the customer (21 percent of the sampl e)
or bargai ni ng wi th the customer (25 percent of the sampl e) gi ve
more trade credi t than those who set pri ces competi ti vel y (al -
though thi s resul t i s not robust to the speci cati on of the model ;
see Tabl e I V).
Trade credi t i s i nuenced by the ease of resel l i ng the goods i n
the event of thei r bei ng repossessed: manufacturers have an
advantage over nanci al i nsti tuti ons i n thi s regard when the
goods are not i mmedi atel y transformed by the customer. I n the
Uni ted States an i ncrease i n the fracti on of the customer s
i nventory that are ni shed goods (that i s, goods that the customer
has al ready transformed and cannot easi l y be resol d by the
suppl i er) decreases the amount of credi t suppl i ed [Petersen and
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Rajan 1997]. We know whether the customers are i ndi vi dual s (33
percent), other manufacturers (25 percent), or retai l ers and
whol esal ers (42 percent). We posi t that the l ast group i s l east
l i kel y to transform the goods after del i very. Si mi l ar to the resul ts
from the Uni ted States, we nd, for l arge rms but not for smal l
rms, that more credi t i s offered when the customer i s a retai l
store.
The si ze and age of the rm can have ambi guous effects on
trade credi t. I f trade credi t i s used as a means of provi di ng
assurance of product qual i ty (i n that the customer need pay onl y
after havi ng had ti me to check the merchandi se), then bi gger and
ol der rms wi l l offer l ess credi t because thei r own reputati ons wi l l
serve to guarantee product qual i ty, maki ng trade credi t unneces-
sary [Long, Mal i tz, and Ravi d 1993; Del oof and Jegers 1996]. On
the other hand, si ze and age mi ght proxy for access to formal
sources of credi t, and therefore bi gger and ol der rms wi l l offer
more trade credi t [Petersen and Rajan 1997]. We nd that ol der
and bi gger rms offer l ess credi t. The coeffi ci ent on l og age
i ndi cates that a rm wi th the sampl e mean age of ve years offers
ten percentage poi nts l ess credi t than a one-year-ol d rm, and ve
percentage poi nts more credi t than a ten-year-ol d rm (Tabl e I V,
col umn (3)). A rm wi th 58 workers (the sampl e mean) offers two
percentage poi nts l ess credi t to customers than a rms wi th 20
workers and two percentage poi nts more than a rm wi th 120
workers.
We nd no rel ati onshi p between offeri ng trade credi t to
customers and recei vi ng a bank l oan, al though we nd that a rm
recei ves more trade credi t i f i t i s the reci pi ent of a bank l oan. The
l atter resul t contrasts wi th a ndi ng of Petersen and Rajan
[1997], that U. S. rms wi th l onger rel ati onshi ps wi th nanci al
i nsti tuti onsthose who are l ess credi t constrai neddo not re-
cei ve more trade credi t. Si nce onl y 20 percent of the rms i n the
Vi etnam sampl e recei ve l oans from banks, a bank l oan mi ght
serve as a stronger si gnal of credi tworthi ness for our Vi etnamese
rms than for U. S. rms.
I X. CONCLUSI ON
Tradi ng rel ati ons i n Vi etnams emergi ng pri vate sector are
shaped by two market fri cti onsthe absence of l egal enforcement
of contracts and the di ffi cul ty of l ocati ng tradi ng partnerswhi ch,
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we have argued, offset each other. The l ack of al ternati ve tradi ng
partners i mpel s rms to cooperate.
Our regressi on resul ts show how rel ati onal mechani sms work
i n al l owi ng contracti ng wi thout l aws i n Vi etnam. A rm trusts i ts
customer enough to offer credi t when the customer nds i t hard to
l ocate an al ternati ve suppl i er. When the rm has competi tors
nearby, i t grants i ts customers about fteen percentage poi nts l ess
credi t. The rms experi ence i n deal i ng wi th the customer al so
matters: a l onger durati on of tradi ng rel ati onshi p i s si gni cantl y
associ ated wi th l arger credi t, at a rate that di mi ni shes wi th ti me.
After two years the amount of credi t offered i s fourteen percentage
poi nts hi gher than wi th a new rel ati onshi p. Vi si ti ng a customer or
suppl i er before the busi ness rel ati onshi p starts i s associ ated wi th
ten percentage poi nts more credi t i n the rst year of the rel ati on-
shi p, al though the effect di mi ni shes over ti me. A customer i denti -
ed through a busi ness network recei ves ten to twenty percentage
poi nts more credi t. When the rm tal ks regul arl y wi th other
suppl i ers of the customer, i t grants about twenty percentage
poi nts more credi t. The network effects are enduri ng, suggesti ng
that networks are used to sancti on defaul ti ng customers.
Rel ati onal contr acti ng i s not unambi guousl y effi ci ency-
enhanci ng. Excl usi on i s the corol l ary of ongoi ng rel ati onshi ps.
Conti nui ng to deal wi th the customary tradi ng partner mi ght
mean refusi ng to deal wi th new entrants, whi ch coul d resul t i n
some i neffi ci enci es.
25
The surveyed rms expressed a hesi tancy to
deal wi th tradi ng partners wi th whom they had never deal t.
Regardi ng both thei r l ongest-term suppl i er and thei r newest
suppl i er, manufacturers were asked: I f another rm you have
never purchased from offered to suppl y thi s i nput for a pri ce 10
percent l ess than your current suppl i er, woul d you purchase from
the new rm? Whi l e onl y 29 percent of our respondents gave the
response that si mpl e economi cs woul d suggest, sayi ng they woul d
accept the bargai n, 53 percent sai d they woul d buy from the new
suppl i er whi l e conti nui ng to buy at the hi gher pri ce from thei r
accustomed suppl i er, and 19 percent sai d they woul d reject the
l ower-pri ced offer outri ght. I f there i s uncertai nty about the
rel i abi l i ty of the new suppl i er, i t coul d be rati onal to reject the
l ower-pri ced offer. But thi s means, some of the ti me, forgoi ng a
genui nel y better deal .
25. Regressi ons avai l abl e from the authors gi ve some evi dence that a rms
sal es grow more sl owl y than average i f i t nds i t hard to l ocate al ternati ve
suppl i ers for i ts i nputs, or i f i ts tradi ng partners are managed by fami l y members.
Page 1315

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APPENDI X 1: I NDUSTRY DUMMY VARI ABLE COEFFI CI ENTS
CUSTOMER CREDI T TOBI TS
(1) (2) (3) (4)
(5)
Domesti c
(6)
Forei gn
(7)
Bi g
(8)
Smal l
I ndustry group:
Metal parts
and prod-
ucts
0.20
(2.04)
0.21
(2.16)
0.14
(1.51)
0.16
(1.63)
0.19
(1.70)
Base
Group
0.16
(1.54)
0.24
(2.08)
Wood prod-
ucts
0.68
(5.22)
0.64
(5.17)
0.40
(3.68)
0.49
(4.22)
0.47
(3.12)
0.46
(2.46)
0.37
(2.42)
0.55
(3.23)
Food and bev-
erages
0.04
(0.46)
0.03
(0.42)
0.02
0.26
0.05
(0.65)
0.09
(0.92)
0.14
(0.80)
0.13
(0.79)
0.01
(0.08)
Cl othi ng and
garments
Base
Group
Base
Group
Base
Group
Base
Group
Base
Group
Base
Group
Base
Group
Base
Group
Constructi on
materi al s
0.17
(1.80)
0.19
(2.01)
0.17
(1.99)
0.17
(1.83)
0.28
(2.57)
0.04
(0.29)
0.28
(2.31)
0.26
(2.17)
Paper prod-
ucts
0.22
(1.93)
0.29
(2.43)
0.16
(1.44)
0.20
(1.69)
0.24
(1.92)
Base
Group
Base
Group
0.32
(2.90)
Handi crafts 0.35
(2.45)
0.41
(2.96)
0.19
(1.47)
0.17
(1.29)
0.03
(0.14)
0.31
(1.47)
0.09
(0.53)
Base
Group
Mi scel l a-
neous
0.05
(0.66)
0.06
(0.80)
0.02
(0.29)
0.08
(1.04)
0.07
(0.73)
0.05
(0.44)
0.06
(0.45)
0.05
(0.62)
El ectri cal
machi nery
0.09
(0.71)
0.07
(0.63)
0.10
(0.89)
0.07
(0.65)
0.06
(0.50)
0.22
(0.90)
0.02
(0.11)
0.06
(0.44)
SUPPLI ER CREDI T TOBI TS
(1) (2) (3) (4) (5)
(6)
Domesti c
I ndustry groups:
Metal parts and
products
0.01
(0.11)
0.01
(0.16)
0.00
(0.03)
0.09
(0.98)
0.14
(1.29)
0.04
(0.36)
Wood products 0.26
(2.66)
0.29
(2.93)
0.26
(2.67)
0.33
(3.31)
0.36
(3.32)
0.27
(2.42)
Food and beverages 0.18
(1.90)
0.18
(2.00)
0.15
(1.68)
0.24
(2.65)
0.20
(1.99)
0.13
(1.26)
Cl othi ng and
garments
Base
Group
Base
Group
Base
Group
Base
Group
Base
Group
Base
Group
Constructi on
materi al s
0.02
(0.22)
0.01
(0.11)
0.01
(0.10)
0.04
(0.37)
0.14
(1.27)
0.01
(0.07)
Paper products 0.29
(1.98)
0.29
(2.01)
0.28
(1.92)
0.29
(2.11)
0.30
(2.00)
0.16
(1.01)
Handi crafts 0.04
(0.34)
0.12
(0.90)
0.08
(0.64)
0.17
(1.41)
0.21
(1.64)
0.10
(0.79)
Mi scel l aneous 0.06
(0.74)
0.09
(1.03)
0.08
(0.96)
0.16
(1.89)
0.20
(2.15)
0.09
(0.86)
El ectri cal
machi nery
0.34
(2.44)
0.28
(2.08)
0.29
(2.15)
0.38
(2.72)
0.43
(2.86)
0.38
(2.25)
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A
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GRADUATE SCHOOL OF BUSI NESS
STANFORD UNI VERSI TY
STANFORD, CA 94305-5015
GRADUATE SCHOOL OF I NTERNATI ONAL RELATI ONS AND PACI FI C STUDI ES
UNI VERSI TY OF CALI FORNI A, SAN DI EGO
LA JOLLA, CA 92093-0519
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