Vertical integration and supplier finance

Vertical integration and supplier finance

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Article ID: iaor2017742
Volume: 50
Issue: 1
Start Page Number: 273
End Page Number: 305
Publication Date: Feb 2017
Journal: Canadian Journal of Economics/Revue canadienne d'conomique
Authors: ,
Keywords: financial, supply & supply chains, investment, decision, finance & banking, simulation
Abstract:

This paper studies access to finance by suppliers that are linked to a multinational enterprise. The theoretical framework consists of a property rights model featuring suppliers that are either vertically integrated or sell to the multinational at arm's length, which in turn affects the availability of different sources of credit. Integrated suppliers are predicted to cover a relatively larger share of their costs using internal sources, consisting of initial wealth plus funds from the multinational parent. In addition, due to the diminished dependence on external funds (local bank credit), integrated suppliers' funding shares are less responsive to changes in their home country's level of financial development. We test the model's predictions using firm survey data from over 50 developing and emerging countries and find broad support.

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