Trade credit supply in African agro-food manufacturing industry: determinants and motives

Abstract

Purpose The purpose of this paper is to examine the determinants and motives for supply of trade credit among agro-food manufacturing firms in African countries. Design/methodology/approach The paper uses a subsample of food manufacturing firms from World Bank Enterprise Survey in eight African countries in 2014. Two-limit Tobit models are specified for the determinants of trade credit supply (TCS) and the motives for TCS are inferred from the determinants. An instrumental variable two-limit Tobit model is estimated to check the endogeneity of trade credit received (TCR) in relation to trade credit supplied. Findings The level of TCS is significantly related with degree of product diversification, manager experience, level of TCR and overdraft availability. From the results, financing motives (particularly liquidity and redistribution) and commercial motives (particularly marketing and quality guarantee motives) for TCS are implied. Research limitations/implications The parameter estimates may contain both demand and supply effects as the two effects cannot be separated due to absence of information on firms’ customers in the data set. The results should be interpreted in this context. Originality/value The motives for TCS by agro-food firms is less understood in the agricultural finance literature and this paper makes an important contribution in this regard. In particular, the paper shows the degree of product diversification is directly associated with TCS, a relationship which has not been explored in the trade credit literature.

Not all that glitters is gold: Political stability and trade in Sub-Saharan Africa

“…In order to account for variable omission bias, three control variables are taken on board in the estimation exercises, notably: inflation, taxes on international trade and foreign direct investment (FDI). The choice of these variables is also motivated by contemporary international trade and economic development literature (Cipollina et al, 2016;Fonchamnyo & Akame, 2017;Dary & James, 2018;Blanas & Seric, 2018;Asongu & Kodila-Tedika, 2017;Bahmani-Oskooe & Gelan, 2018;Kaminchia, 2019;Shobande & Shodipe, 2019;Uysal & Mohamoud, 2019). In what follows, their expected signs are discussed.…”

“…Contemporary studies covered in the former strand on drivers of trade include: Kaminchia (2019) who has examined determinants of trade cost in the East African Community; Uysal and Mohamoud (2019) who have determined export performance in East African countries; Dary and James (2018) have explored trade credit supply in the African agro-food manufacturing sector from perspectives of motives and determinants while Blanas and Seric (2018) are concerned with drivers of intra-firm trade in SSA; Asongu and Kodila-Tedika (2017) have investigated linkages between trade, aid and terror; Cipollina, Demaria and Pietrovito (2016) focus on the role of innovation in boosting trade within the framework of quality standards; nexuses between international trade and exchange-rate are investigated by Bahmani-Oskooe and Gelan (2018) while Fonchamnyo and Akame (2017) examine drivers of export diversification in SSA. This study is closer to the second strand in its focus on the nexus between political stability and trade.…”

Research on trade credit – a systematic review and bibliometric analysis

“…Wilner (2000) adds that the provision of concession and renegotiation influence TC demand and supply of distressed firms. The other factors explored in the remaining literature include: ethnic bias (Fafchamps, 2000); transactional and financial factors (Ono, 2001); banking restrictions (Nilsen, 2002), monopoly power of suppliers (Fisman and Love, 2003); market competitiveness and buyer opportunism (Burkart and Ellingsen, 2004); firm size and financing terms (Miwa and Ramseyer, 2008); level of inventory, profitability, risk and liquidity (Bougheas et al, 2009;Dary and James, 2019); capacity to generate internal funds, economic growth (García-Teruel and Martínez-Solano, 2010); financial distress, market share, inventories, operating cash flow, sales, export propensity, access to formal finance, size of firms (Afrifa and Gyapong, 2017), etc. Thus the first cluster exposes a number of factors influencing the demand and supply of TC providing empirical evidence to the commercial, operational and/or financial views of TC transactions.…”

“…In the modern parlance of corporate finance, it is considered as an investment in receivables (Paul et al, 2018). Emerging out of natural business transactions (Cunat, 2006), it is guided with financial, operational/transactional and commercial motives Dary and James, 2019).…”

“…Firm, product, industry and market-specific characteristics reflecting market competitiveness significantly influence the demand and (or) supply of TC, which in turn affects the firm performance, growth, level of inventory, etc. (Ng et al, 1999;McMillan and Woodruff, 1999;Fafchamps, 2000;Ono, 2001;Nilsen, 2002;Fisman and Love, 2003;Miwa and Ramseyer, 2008;Bougheas et al, 2009;Afrifa and Gyapong, 2017;Dary and James, 2019). Thus, the theoretical and empirical exposition of the literature on TC is diverse with contributions from multiple streams of studies such as; business management, banking, corporate finance, economics, operations, marketing science, industrial engineering (Paul and Boden, 2008).…”