Abstract
AbstractThis study examines the association between financing strategies and firm investments. Employing theory of financing constraints and literature on formal/informal financing of small businesses to investigate a set of 15,851 observations of Vietnamese small businesses in 11 years, we suggest a pecking order of financing strategies in terms of firm investments, in ascending order as follows: (a) firms using no external finance, (b) firms using informal finance only, (c) firms using both formal and informal finance and (d) firms using formal finance only. In addition, we incorporate the theory of social capital to explore the moderating effect of networking on the relationship between financing and investment. Empirical results show that networks may enhance the relationship between informal finance and firm investments but not formal finance.
Highlights
Le and Nguyen (2009) show that in the context of Vietnamese Small and Medium Enterprise (SME), networking with customers and government officials promotes the use of bank loans. This finding is recently re-confirmed by Pham and Talavera (2018) who investigate another set of Vietnamese SMEs and find that social capital could facilitate loan applications: firms that have a closer relationship with government officials and other business people can get loans of longer duration
This study investigates the association between different financing sources and investments of small businesses in Vietnam
Using a panel dataset of 3,715 small businesses in 11 years (2005–2015), we offer the initial empirical evidence that firm investment is a function of financing sources
Summary
This finding is recently re-confirmed by Pham and Talavera (2018) who investigate another set of Vietnamese SMEs and find that social capital could facilitate loan applications: firms that have a closer relationship with government officials and other business people can get loans of longer duration For these reasons, firms with more social capital are less financially constrained and are more likely to successfully secure their investment projects. To reduce concerns of endogeneity, all variables that may suffer from reverse effects are lagged 1 year They include firm size, export, innovation, association, liability, financing sources and social networks. The fixed-effects estimator could deal, to some extent, with unobservable heterogeneity and potential endogeneity of missing
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