Formal Versus Informal Finance and SMEs’ Participation in Global Value Chains

This study examines the impact of various sources of formal and informal finance on small and medium enterprises’ (SMEs) participation in global value chains (GVCs). Employing a rich panel dataset on Vietnamese private manufacturing SMEs during the period 2005–2013, it finds that short-term formal and informal loans do not have statistically significant effects on SMEs’ participation in GVCs, but trade credit does. Using the instrumental variable approach, we have also addressed the endogeneity concern in the trade credit — SMEs’ participation in GVCs. Our study contributes to SMEs’ internalization process in developing countries, where trade credit plays an important role in this process.