Financing strategy of transnational supply chain with vertical shareholding under tax system difference: Creditor or guarantor?

Abstract

Economic globalization enhances the international effect of income tax collection, which significantly impacts the taxable income and cash flow management of a transnational supply chain. This study investigates the financing preferences of the buyer and supplier in a transnational supply chain with vertical shareholding under tax symmetry and asymmetry. The buyer can act as a creditor to provide early payment financing or as a guarantor to help the supplier obtain a low-interest loan. We construct Stackelberg game models to determine the buyer’s and supplier’s equilibrium decisions and profits in two financing strategies under different tax systems. The results indicate that the buyer and supplier have inconsistent financing preferences when the supplier cannot borrow directly from the bank. The buyer always prefers to be a creditor, whereas the supplier’s financing preference depends on the trade-off between the sales revenue, production cost, financing interest, tax cost, and dividends. Surprisingly, we find an optimal shareholding ratio interval related to tax rates that can eliminate double marginalization under tax symmetry, and the supply chain can be more profitable than that under centralized decision-making. However, double marginalization cannot be eliminated under tax asymmetry. The results suggest management implications for the financing strategy choice and operational decisions of a transnational supply chain with vertical shareholding.