Trade credit provision and innovation: A strategic trade-off

Abstract

Our study focuses on Chinese-listed firms, revealing a distinct substitution effect between trade credit provision and innovation, diverging from the complementary relationship found in prior U.S. research. We identify a negative correlation between trade credit provision and R&D intensity, particularly evident among supplier firms with reduced bargaining power. Surprisingly, no discernible link emerges between supplier financial distress risk and trade credit provision or R&D outcomes. Additionally, we find that trade credit provision hampers innovation, evidenced by a decline in patent applications and granted patents. These findings suggest that, especially in contexts marked by intense product market competition and incomplete financial markets, supplier firms strategically opt for trade credit provision as an alternative to innovation—a form of relationship-specific investment. Importantly, our results imply that the reduction in firm innovation activities is less likely a post hoc consequence of financial constraints resulting from trade credit provision.