Are Bank-Firm Relationship and Political Connection Substitutes or Complements? How Does Firms Maximize Credit Availability: The Case of Vietnam

Abstract

Whether the bank-firm relationship and political connections are the substitutes, or the complements is the well-researched question on an empirical research level on credit availability. This paper studies the influences of the bank-firm relationship and political connection on firm’s access to credit using a hand-collected dataset of Vietnamese small and medium-sized enterprises (SMEs). The results indicate that there is a complementary link between the bank-firm relationship (length of relationship with the main bank and the number of banks) and political connection in terms of maximising firms’ credit availability. This research has relevant policy implications for emerging economies characterised by risks of the local government corruption. The policy-makers should prefer the transaction banking system to the relationship banking system. This matter is the dark side of the bank-firm relationship.