Social networks, informal trade credit and its effects on business growth: evidence from the local garment trade in Vietnam

Abstract

This paper argues that while informal institutions in developing countries are effective in facilitating exchange, without complementing formal institutions it will constrain their prospects of business growth. Ample research studies made in this field suggest that social networks are one of the key determinants of informal credit supply. However, such network effects are limited simply because supplier-buyer relationships based on such networks are, in reality, quite rare. In an environment without effective formal sanction mechanisms, suppliers face significant risks in granting trade credit to buyers particularly in a competitive market with large numbers of suppliers and homogeneous products, as is the case in Ho Chi Minh City, Vietnam. Therefore, monitoring of buyers’ behaviour becomes important, but as such activities are costly to suppliers as it discourages and adversely affects suppliers to establish new trade relationships and expand businesses. As such, the development of formal institutions such as information sharing mechanisms and establishing formal sanctioning mechanisms, including effective courts, will prove effective to stimulate business opportunities and growth.