This version: 22 May 2019 1. Introduction As we know, exporting sector is crucial to the nation’s economic health as well as the Vietnam economy in particular. An increase in exports implies business growth, greater profits, and more jobs. Besides, there are also advantages such as Enhancing domestic competitiveness, reducing dependence on existing markets, gaining global market share and so on.
Making the export decision requires careful assessment of various factors. One of them is the impact of the payment method on export decisions. There is a wide range of payment methods used in international trade. The selection of the payment method which depends on factors such as the relationship between exporters and importer, the ability of customers to meet regulations set by the commercial bank in terms of payment procedures and transaction fees, and the characteristics of goods, etc.
However, the favorable payment method for exporters also contains many risks for importers and vice versa. When trading goods across borders, firms choose the different payment method. The main decision is whether payment should be made before delivery (prepaid) or after delivery (postpaid). This is an important aspect of any commercial transaction as it determines whether the trading partner must complete the transaction and who takes the risk.
Cash in advance (CIA) is one of the payment methods that affect a company's ability to export. The CIA is a method that provides an alternative business funding source that export companies can use when there is a lack of collateral or credit ratings. The CIA is a stipulation in some shipping agreements, requiring that an importer must pay the exporter in cash when contracts are signed or before the shipment is made. Advance payment is a safe mode of payment for any business including export business.
Receiving an amount of sales in advance helps an exporter in several ways to plan its financial activities smoothly. From a buyer’s point of view, however, the advance payment contains risk, as the buyer advance payments before the dispatch of goods. 1 This version: 22 May 2019 With cash-in-advance payment terms, an exporter can avoid credit risk because payment is received before the ownership of the goods is transferred. In addition, the CIA has some advantages for exporters like: It will be a relatively safe way to receive cash follow that exporters no need for collateral or credit because commercial loans can affect credit ratings in contrast with the CIA.
Exporter can have cash quickly without much paperwork, the process is very simple, quick procedures so it helps solve short-term cash flow problems. Small businesses encounter short- term cash flow problems that can cause major problems for the company. The CIA can help small companies pay cash they need to solve cash flow problems to produce and operate businesses. The final point is that the approval rate is really high.
When compared to the ratios of normal commercial bank loans, it is clear that the CIA has the highest approval rate. In general, the use of the CIA is much faster than traditional business loans. If the company needs to replenish exports or attempt to have the expected sales cycle or to have large quantities of goods or raw materials to produce exports, without delay. Most small and medium enterprises will benefit from an increase in the prepaid capability of importing companies.
The CIA can be a great solution for small businesses who do not have collateral or credit history to apply for a loan or business credit limit. In addition, Businesses can then use the money for their company's operations and increase export activity. Requiring payment in advance, however, is the least attractive option for some of the buyers, because it creates unfavorable cash flow. Foreign buyers are also concerned that the goods may not be sent if the payment is made in advance.
Thus, exporters who insist on this payment method as their sole manner of doing business may lose to competitors who offer more attractive payment terms. In contrast to the prepaid method, importers prefer to use the open account method. However, this method has some drawbacks such as importers do not accept goods or lose the ability to make payments. Exporters will have to pay the transportation cost and may sell them cheaply or re-export, which waste time and resources of exporters.
We will explain why prepayment contributes to an increase in the firm's decision to export. 2 This version: 22 May 2019 Hoefele, A. (2016) study the impact of payment methods including the prepayment method, open accounts and letters of credit to companies operating internationally. They focus on the effects of international differences in legal and financial conditions on the payment contract choice for international and domestic trade.
There are several research articles related to credit restrictions of companies like Manova (2013) only studies the credit impact of companies affecting the export of that company. Specifically he finds out that firms that are more affected by credit constraints are less likely to participate in export markets, and if they do, they export less. The Muu ˆ ls (2008) model has the same implication - firms are more likely to be exporters if they are less credit constrained. Buch et al (2009) research the impact of financial constraints on the decision to engage in foreign direct investment and on foreign affiliate sales.
As far as we know, there is no article that study the impact of prepaid on export activities of credit- constrained companies. They have only study separately the impact of the CIA on the company's ability to export as well as the impact of credit constraints on the export decision of a company. Therefore this thesis examines the remaining problem of the four papers on which a case study on the prepaid case affects the company's ability to export in specifically and how the prepaid effect on the export decision of credit- constrained companies? This thesis considers whether the CIA has a significant impact on the export decisions of exporting companies, especially for small companies that have several credit constraints. We argue that international transactions are inherently subject to more uncertainty than domestic transactions and that the CIA serves as a quality signal that helps reduce this high uncertainty.
In our analysis, we focus on the CIA financing to this purpose which we develop a model to determine the driving of factors of the export decision with a focus on the CIA on companies by the scale and by the extent of its credit constraint. More specifically, this thesis has four research questions: How does the effect of the CIA on export decisions depend on transnational firm- level data especially for developing countries? 3 This version: 22 May 2019 Does prepayment affect the export of small companies? Is the impact of CIA stronger for companies that have severe credit constraint? Does the CIA contribute to increasing export capacity for companies in Vietnam? This thesis provides evidence of prepaid payments that the firm receives from a large number of countries, suggesting that firm characteristics are a central determinant. As predicted by the theory prepaid payment transactions are more likely to be implemented in developing countries. We extend the original theory and use firm-level cross-country data from 2006-2010 and probit method to estimate an additional prediction about the effect of the CIA to the company's export.
With the probit method we use a model that shows the impact of the firm's export decision through 6 variables to measure such as CIA variables, Size, Foreign, etc. More specifically, we show that in small companies and especially credit-constrained companies more CIAs will be used than medium-sized companies and companies with less credit constraints. The key finding is that the CIA fosters export participation of small firms only. We find that cash-in-advance has a positive effect on the small firms' probability to export.
This result is particularly strong for severer credit-constrained firms. One possible explanation is that CIA does help small firms export by ameliorating credit constraints while it plays no role in large firms. Moreover, cash-in-advance relaxes the credit constraint facing small firms in domestic markets while medium firms rely on alternative forms of credit. However, the CIA plays no role in determining the export participation in Vietnam.
This also shows that Vietnamese firms use alternative methods such as access to bank loans, from other organization or borrow from their relatives and friends rather than using the CIA. The rest of the thesis is organized as follows: In Section 2, Literature review we show three strands of literature which the thesis based on. In Section 3, we develop a model for businesses at the cross-country firm-level data level of factors affecting their ability to export. 4 This version: 22 May 2019 In Section 4, present our empirical results and evaluating models for companies in Vietnam In Section 5, conclude.
5 This version: 22 May 2019 2. Literature review Our paper is based on three strands of literature. First, we rely on the large body of literature on trade credits. Trade credit is part of a joint commodity and financial transaction in which a firm sells goods or services and simultaneously extends credit for the purchase to the customer.
Despite the importance of quantity, commercial credit has received very little attention in the literature of the financial economy. In Lee and Stowe (1993), companies expand trade credit to ensure product quality for customers in their home countries. Their research is to explain the cross- sectional variation in trade credit across firms and industries. They had developed a model of the sale process in the intermediate goods market to explain the existence of trade credit with various payment terms.
The paper shows that there exists a separating equilibrium where the size of the cash discount conveys information about product quality. The driving forces of this equilibrium outcome are the risk divide efforts of the producer and buyer as well as information asymmetry about product quality. The remaining document is based on a guarantee by the quality hypothesis that was developed by Long et al. He supposes that although trade credit has long been play an important source of financing for associations, it is one of the least understood methods of doing business and trade credit can serve to distinguish high- and low-quality goods (and producers).
Therefore, he focuses on the sellers' decision to extend trade credit and develop a reduced form model reflecting supply and demand influence. Empirical evidence of the quality that signals motivation for a small sample of the US and European companies were conducted by Klapper et al (2012) in a recent research paper. They find that the longer payment times offered to buyers, the less reliable suppliers are. In other words, buyers are offered longer payment times if they buy from less reliable suppliers.
In addition, suppliers offer prepaid discounts to less dependable buyers to minimize payment risks. Although trade credit is actually more expensive than bank credit, it contributes to reducing uncertainty, therefore, access to commercial credit helps the less productive companies benefit more. Biais and Gollier (1997) build up a model in which the company extends commercial credit to show their trust in the reputation of the company that it provides trade credit. Their arguments require trading partners to take 6 This version: 22 May 2019 advantage of bank-related information.
If the sellers intent to extend trade credit, and thus to bear the default risk of the buyer, it must be that it has good information about the latter. On observing, the bank update positively its beliefs about the buyer, and therefore agree to lend. In other words, trade credit enables the private information of the seller to be used in the lending relationship, and this additional information can alleviate credit rationing due to adverse selection. Giannetti and colleagues.
(2011), find that trading partners do not have continuous information advantages. He saw that large firms and especially firms with many suppliers also receive more trade credit for longer periods.