Business group affiliation in rural contexts: Do small firms grow faster through working capital management?

Abstract

AbstractThis paper investigates whether small firms affiliated with business groups that operate in rural regions grow faster through conservative working capital management. Conservative working capital management refers to granting long payment delays to customers and holding high levels of inventories to prevent stockouts. Small firms affiliated with business groups have access to the groups’ internal capital markets to finance conservative working capital management. They can therefore provide liquidity to their customers in rural regions where access to banking debt is more difficult compared to that in urban territories. Using a firm random effects model on a large panel of French small firms operating in the trade industry, we report that business group affiliation positively moderates the positive effect of working capital management on firms’ growth in rural contexts. Our results challenge a commonly held view that states that small firms grow faster as “light” organizations as we present evidence that growth is also achieved by firms holding larger inventories and granting more trade credit to their customers, at least in the French context.