Credit constraints, fragmentation, and inter-firm transactions

Marjit, Sugata; Yang, Lei; Ray, Moushakhi

doi:10.1080/16081625.2014.870462

Cited by 3 publications

(2 citation statements)

References 9 publications

(6 reference statements)

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“…Liquidity constraints encourage fragmentation of the production process as the net borrower finds it advantageous to specialize in producing fragments within the production process and this leads to the entry of new firms. When the entry effect dominates the specialization effect, the total output is greater even under fragmentation (Marjit et al, 2014). Deardorff (2000) shows how fragmenting production processes in various traded segments create problems during the financial crisis.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Access to and cost of finance is one of the determining factors for a firm’s growth (Demirguç-Kunt & Maksimovic, 1998; Rajan & Zingales, 1998), and the lack thereof is known to cripple a firm’s investment in fixed capital (Ojah et al, 2010; Winker, 1999) and research and development (R&D; Winker, 1999). A financially constrained firm typically relocates its production process to external suppliers rather than organizing the whole process internally (see, Dutta & Dhar, 2020; Marjit et al, 2014). While most literature on this aspect consider firms’ trading decision and financial constraints to analyze the impact of the latter on firms’ production reorganization, they tend to ignore the extent and intensity of interfirm transactions that might result from intracountry production reorganization.…”

Section: Introductionmentioning

confidence: 99%

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Credit Constraints and Increased Firm-Level Production Fragmentation: Evidence from India

Ghosh

Dutta

2022

Global Journal of Emerging Market Economies

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Previous studies have underlined various rationales for production fragmentation from wage differentials, decreased trade costs, access to specialized skills and resources, access to new markets, and benevolent government policies, to technological advancement. However, the idea that a firm’s financing structure can influence its production structure remains less explored, more so empirically. Firms that are financially constrained find it difficult to complete the entire production process in-house and therefore tend to resort to production fragmentation. The current study investigates this link between the extent of credit constraints faced by firms and their outsourcing behavior using data from Indian manufacturing firms over a period of ten years. We also separately study this linkage for firms that tend to export more vis-à-vis firms that export less, to ascertain if increased exporting have relaxed the financial constraint of the firms. The results confirm the positive effect of credit constraints on outsourcing behavior. For a robustness check, subsample regressions and alternative measures of constraints are also analyzed. The study has important policy implications for developing countries such as India, where outsourcing may prove to be a profitable reorganization strategy for firms that are financially constrained.

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Section: Literature Reviewmentioning

confidence: 99%