Credit Choices and its Effect on Firm Growth: The Case of Smes in Vietnam

Abstract

This study examines the financing choices and its impact on firm growth of different types of small and medium enterprises (SMEs) in Vietnam. Each type of external finance has its pros and cons to borrowing enterprises. Informal finance has an informational advantage, while formal finance is scalable in supply. Using a detailed and unique dataset of Small and Medium enterprises in Vietnam, the study shows that informal finance plays a vital role in SMEs' growth. Furthermore, informal finance is associated with higher sales growth of household businesses. In contrast, the complementary effect of both formal and informal financing sources contributes to the development of non-household enterprises. The study also suggests to policymakers in emerging countries like Vietnam that the government should consider promoting formal and informal finance properly instead of compressing the latter.

Keywords: formal finance, informal finance, financing choice, credit choice, firm growth, Vietnam.