Trade credit in emerging economies: an interorganizational power perspective

Publication Date27 Mar 2020
Pages768-783
DOIhttps://doi.org/10.1108/IMDS-05-2019-0292
AuthorBai Liu,Yibo Wang,Yongyi Shou
SubjectInformation & knowledge management,Information systems,Data management systems,Knowledge management,Knowledge sharing,Management science & operations,Supply chain management,Supply chain information systems,Logistics,Quality management/systems
Trade credit in emerging
economies: an interorganizational
power perspective
Bai Liu
Business School, Jilin University, Changchun, China
Yibo Wang
Business School, Jilin University, Changchun, China and
McCombs School of Business, University of Texas at Austin, Austin,
Texas, USA, and
Yongyi Shou
School of Management, Zhejiang University, Hangzhou, China
Abstract
Purpose The extant literature recognizes that trade credit is influenced by the power imbalance between
buyers and suppliersbut most studies focus on either buyerpower or supplier power. The purpose of this study
is to investigate how buyer power and supplier power interact and jointly influence trade credit. Moreover, this
study examines the moderating effects of political ties in an emerging economy context.
Design/methodology/approach Aresearch framework was developed by combiningresource dependence
theory and institutional theory to investigate the interactive effects of market power (i.e. market share and
supplier concentration)and non-market power (i.e. political ties) on trade credit. The proposed hypotheseswere
empirically tested by a fixedeffects model using secondary data from 2,433 listed firms in China.
Findings The results show that a buyer firms market share promotes trade credit but this effect isweakened
by supplier concentration. Moreover, the buyers political ties enhance the impact of market share on trade
credit and attenuate the negative moderating effect of supplier concentration.
Originality/valueThis study contributes to the trade credit andsupply chain power literature by identifying
the interactive effects of marketshare, supplier concentration and political ties in trade credit. It advancesour
understanding of how tradecredit is jointly determined by a variety of factors in emergingeconomies.
Keywords Trade credit, Power, Market share, Supplier concentration, Political ties, Supply chain finance
Paper type Research paper
1. Introduction
Trade credit is a form of supply chain financeused by many firms to allow delayed payment
from their buyers (Li et al.,2019). Trade credit accounted for about 90 percent of world
merchandise trade in 2007 (Williams, 2008) and about 80 percent of business-to-business
transactionsin the United Kingdom and United States(Seifert et al.,2013).It is widely accepted
that buyers with higher power enjoy more trade credit (Giannetti et al.,2011;Klapper et al.,
2012). However, thereal-world business practice is more complex. Forexample, as a powerful
buyer inthe retail industry, Walmart is criticized to exploitits suppliers (Van Riper, 200 7)but is
also reported to helpits suppliers with faster payment (Lee et al.,2018). Obviously, trade credit
is not merely determined by buyerpower. Therefore, it is necessary to unpack the contingent
factors affectingthe relationship between buyer power and trade credit,thereby contributing
to the better understandingof the real-world practice of trade credit. Thus, it can also provide
managerialinsights for decision-makers in betterutilizing their internal and externalresources
rather than relying on marketpower as the only means of negotiating trade credit.
IMDS
120,4
768
This work was supported by the National Social Science Foundation of China under Grant No.
18BJY232, National Natural Science Foundation of China under Grant No. 71472166 and 71821002, and
China Scholarship Council.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/0263-5577.htm
Received 27 May 2019
Revised 6 September 2019
26 November 2019
4 January 2020
Accepted 16 January 2020
Industrial Management & Data
Systems
Vol. 120 No. 4, 2020
pp. 768-783
© Emerald Publishing Limited
0263-5577
DOI 10.1108/IMDS-05-2019-0292
When buyer firms request their suppliers to provide trade credit, this action would be
influenced by the power imbalance between buyers and suppliers (Porter, 1979;Pfeffer and
Salancik, 2003;Cho et al.,2019). The more powerfulparty is likely to exploit the weaker party
(Schleper et al., 2017) to demand more favorable trade credit terms. The extant literature has
reportedthe significanteffects of buyer power(e.g. Giannetti et al., 2011;Klapper et al.,2012)and
supplier power (e.g., Fabbri and Klapper, 2016;Chod et al., 2019). However, few studies have
examined how buyer power and supplier power jointly determine trade credit. Given that
interorganizational power is a relative concept (Touboulic et al., 2014), this study attempts to
narrow thisresearch gap by investigatingthe interactive effect of bothpowers on trade credit.
Equally important and noteworthy is how institutional factors affect trade credit. Prior
studies indicate that firms adopt trade credit at a higher level in emerging economies, where
credit from financial intermediaries is limited (Giannetti et al., 2011). Although previous
studies have highlighted the importance of market power in trade credit (e.g., Klapper et al.,
2012;Chod et al., 2019), they provide limited understanding of how institutional factors affect
the power imbalance in buyersupplier relationships. According to institutional theory,
which focuses on how social influences and pressures shape organizational actions (Oliver,
1997), political ties are one of the valuable institutional resources for firms (Peng and Heath,
1996;Peng, 2003), particularly in emerging economies with imperfect legal systems and
capital markets (Fisman and Love, 2003). Therefore, the power imbalance in buyersupplier
relationships could be altered by political ties. Thus, there is a need to explore how political
ties affect trade credit via power imbalance.
Against this background, we aim to investigate trade credit in emerging economies from
an interorganizational power perspective to answer the following research questions:
RQ1. How do buyer power and supplier power jointly influence trade credit?
RQ2. How do buyer firmspolitical ties moderate the relationships between market
power (including buyer power and supplier power) and trade credit?
These research questions are examined using longitudinal secondary data from 2,433 listed
firms in China during the period from 2009 to 2017. The results indicate that a buyer firms
market share (an indicator of buyer power) promotes trade credit, but this effect is weakened
by supplier concentration (an indicator of supplier power). Moreover, a buyer firms political
ties enhance the impact of market share on trade credit and attenuate the negative
moderating effect of supplier concentration.
This study contributes to the relevant literature in several ways. First, it advances our
understandingof trade credit by identifying the interactive effect of buyer powerand supplier
power. Second,this study further reveals that politicalties, as a critical resource to gain power
advantage in emerging economies, can affect the power imbalance in buyersupplier
relationships, which in turn will have impact on trade credit. In addition, our results may
enlighten managersin China and other emerging economiesto gain a better understanding of
how trade credit is determined by power imbalancebetween suppliers and buyers.
2. Literature review and hypotheses development
2.1 Trade credit
Trade creditrefers to a form of financing used by many firms to allow delayed payment from
their buyers (Li et al., 2019). Early research observes that trade credit can serve as a substitute for
bank loans to help small or credit-constrained buyer firms (Ge and Qiu, 2007). Recent studies
argue that trade credit is not only for financing purpose but also a strategic tool for suppliers to
achieve competitive advantages in case of strong product competition (Lee et al., 2018)and
maintain good relationships with their buyers (Wilner, 2000;Giannetti et al., 2011). Empirical
studiessuggestthat trade creditmay be providedfor non-financingreasons(Klapper et al.,2012).
Trade credit in
emerging
economies
769

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