Abstract
The paper examines the effect of locating in industrial cluster and holding production/ supply contract on access to trade credit by informal firms in Ghana. It employs data from the 2013 World Bank survey of informal firms in Ghana. The results show that trade credit is the most important external source of financing working capital for firms in the informal sector. Binary probit was employed in the econometric analysis. Controlling for firm characteristics, financial characteristics, firms’ largest owners’ characteristics, industrial sector and geographical location, the results show that both locating in industrial cluster and holding production/supply contract significantly increase access to trade credit by informal firms. Other variables significantly associated with access to trade credit include firm age, number of owners, ownership of location, access to loans from banks and friends, and firms’ largest owners’ characteristics – formal employment status, marital status and educational status. Based on the results, policies focused on promoting the development of industrial clusters can help informal firms to mitigate their credit constraint through increased access to trade credit. Informal firms can also mitigate their credit constraint via trade credit by obtaining production/supply contracts. Keywords : Trade Credit, Informal Firms, Industrial Cluster, Supply Contract, Probit, Ghana
Highlights
It is well documented in literature that trade credit is an important source of financing working capital among non-financial firms (e.g., Emery, 1984; Long, Malitz and Ravid, 1993; Cuevas, Fafchamps, Hanson, Moll & Srivastava, 1993; Ghana Journal of Development Studies, Vol 15 (2)Petersen & Rajan, 1997; Wilson & Summers, 2002; García-Teruel & Martínez-Solano, 2010; Carvalho & Schiozer, 2011)
The average monthly sales of firms are around GHS 1,40023. This indicates many of the firms in the informal sector in Ghana are small in size
This paper examines the role of locating in industrial cluster and holding production/ supply contract on access to trade credit from suppliers upstream and/or customers downstream among informal firms in Ghana
Summary
Petersen & Rajan, 1997; Wilson & Summers, 2002; García-Teruel & Martínez-Solano, 2010; Carvalho & Schiozer, 2011). As a source of financing, trade credit comes in two forms: (1) supplier credit and (2) prepayment/advanced payment. Supplier credit is trade credit received from input suppliers upstream; this is generated when firms receive inputs from suppliers upstream and payment is delayed or deferred to a later date (Ng, Smith & Smith, 1999; García-Teruel & Martínez-Solano, 2010; Carvalho & Schiozer, 2015). Prepayment or advanced payment is described as reverse trade credit in the literature because customers are advancing credit to suppliers (see e.g., Daripa & Nilsen, 2011; Mateut, 2014). Advance payment is common among African microenterprises (Fafchamps et al, 1995)
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