Academic journal article Entrepreneurship: Theory and Practice

The Impact of Networking on Bank Financing: The Case of Small and Medium-Sized Enterprises in Vietnam

Academic journal article Entrepreneurship: Theory and Practice

The Impact of Networking on Bank Financing: The Case of Small and Medium-Sized Enterprises in Vietnam

Article excerpt

It is argued that networking is crucial for small and medium-sized enterprises (SMEs), particularly in emerging economies as they seek to access resources for development. One key resource in emerging economies is bank financing. In this paper, we develop a model that examines the net effect of different network ties on bank financing to private SMEs. The results support our hypothesis that different network ties influence SMEs' use of bank loans in different ways. Specifically, networking with customers and government officials promotes the use of bank loans, while networking with suppliers and social ties reduces the need for bank loans. This study provides a number of research and managerial implications, which are discussed at the end of the paper.

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Entrepreneurship has been an engine of sustained economic expansion in both developed and emerging economies (e.g., Baumol, 2002; Peng, 2001; Smallbone & Welter, 2001; Thornton, 1999). One critical success factor for entrepreneurial firms is gaining sufficient access to external sources of finance (Ahlstrom & Bruton, 2006; Le, Venkatesh, & Nguyen, 2006). This is particularly true in emerging economies because such resources are severely constrained. For example, capital markets, venture capital, and angel investors are typically at nascent stages of development. As such, bank loans tend to be the only significant formal sources of external funding for private small and medium-sized enterprises (SMEs) in emerging economies. Therefore, a key challenge for many entrepreneurs is to find a means of accessing bank loans efficiently.

From the perspective of commercial banks, lending to SMEs is perceived to be risky. But such lending is even more challenging for banks in emerging economies because the institutional environment is less developed. Banks rely on stable market institutions such as auditable business information with predictable rule of law that is enforceable to ensure repayment of their loans in some form (Nguyen, Le, & Freeman, 2006; O'Connor, 2000). Institutional stability and predictability reduces risks and uncertainty, and enhances the probability of loan success (that the principal and interest on the loan will be paid back, in full, and on time). Such market institutions, however, are often absent in emerging economies (Ahlstrom & Bruton, 2006; Nguyen, Weinstein, & Meyer, 2005; Peng, 2003). In these countries, uncertain property rights, vague laws and unpredictable law enforcement, and unavailable business data all combine to reduce the ability for local banks to emulate the practices applied by banks in developed countries. As a result, banks in emerging economies have to adjust, or rely on different lending practices (O'Connor).

If banks in emerging economies apply different lending practices, then firms borrowing from these banks also need to tailor their practices accordingly. However, empirical studies of SME bank financing in emerging economies are sparse (Cook, 2001). Instead, most studies on bank financing of SMEs examine firms in business environments that have clear property rights, as well as developed market and regulatory infrastructures, which are often less robust or almost absent in emerging economies (Ahlstrom & Bruton, 2006; Nguyen et al., 2005; Peng, 2003).

In emerging economies, personal relationships and networks are often seen as an effective substitution for well-established institutions (Ahlstrom & Bruton, 2006; Xin & Pearce, 1996). A number of studies suggest that networking between entrepreneurs, bankers, government officials, and friends and relatives may play an important role in helping both lending institutions and corporate borrowers (Ahlstrom & Bruton; Le et al., 2006; Peng, 2001; Peng & Luo, 2000). For lending institutions, networking helps them obtain information, locate markets, and better secure their investments (Le et al. …

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