The importance of international trade credit for industry investment

Abstract

Trade credit is an important feature of many trade contracts, offering buyers a means of financing purchases using credit from suppliers. This paper aims to identify a channel through which international trade credit affects industry investment. We use an interaction variable approach, first implemented by Rajan and Zingales (1998), where industries are ranked by different propensities to use supplier credit according to their industry specific production properties. This ranking is interacted with measures of aggregate international trade credit at the country level to examine how industry investment responds to the availability of international trade credit. The dataset includes 23 manufacturing industries in 19 countries from 1999 to 2009. Controlling for industry output along with access to and dependence on domestic external finance, we show that industries with a higher propensity to use supplier credit benefit from greater international trade credit in terms of a higher investment share relative to economy-wide investment. The results suggest that relationship financing, as captured by international trade credit, is an important catalyst for industry investment for those firms that rely on supplier connections.