Interfirm Relationships and Informal Credit in Vietnam

Abstract

A survey of private firms in Vietnam is used in this paper to examine ongoing interfirm relationships; this survey gives detailed data on a firm's relationships with specific trading partners. We take as our measure of a firm's trust in its trading partner the amount of trade credit it grants. Bilateral relationships between trading partners are embedded in two kinds of networks: one based on pre-existing ties of family or friendship, the other on communication among manufacturers of similar types of goods.

While we find that reputation is a workable basis for contracting in Vietnam, we also find some shortcomings of the informal mechanisms. Small firms rely more heavily than large firms on family connections and on gossip from the customer's other trading partners. Firms dependent on trading partners run by family members grow slowly. These observations suggest that to be successful, rather than just to survive, a firm must somehow escape its reliance on the family-based clientelistic links. Interfirm networks remain significant even for large firms, however, in that they use other manufacturers of similar goods as sources of information about new suppliers, suggesting that a network of firms in the same industry, being an open network, does not limit a firm's success in the way that a family network does. Our results are compared to the existing trade credit literature.

JEL Classification: L14, D23