Inter-Firm Linkages and Finance in Value Chains

Abstract

The literature on small and medium-sized enterprise (SME) finance highlights linkages with large firms in value chains as a possible way to enhance access to credit. However, much of the literature on value chains emphasizes issues of coordination and governance of those linkages and their effects on industrial upgrading with little mention to the financial implications for SMEs. This paper explores this gap by looking for evidence on the impact of SMEs' access to finance of inter-firm linkages and specifically interactions with large firms. Using original enterprise-level data in three different Latin American and Caribbean sectors and countries (agro-industry in Argentina, furniture in Brazil, and information and communications technologies in Costa Rica), a comparison between the different sources and instruments of finance used by SMEs is presented. A distinction is made between arm's length financial mechanisms based on "hard data" and relationship finance based on "soft data." Findings suggest that chain governance matters for the type of role large firms can play in enhancing SMEs' access to finance. Policies should take into account the type of chain governance between large firms and SMEs across industries and countries when providing incentives to increase the role of large firms as direct financiers or guarantee providers for SMEs.