The impact of government contracts on trade credit and policy implications for Vietnam

Abstract

This paper investigates the impact of government contracts on trade credit using World Bank
Enterprise Surveys with 45.690 observations of 105 countries, from 2006 to 2020. By using the Pool OLS
model, empirical results demonstrate that government contracts have a negative impact on trade credit.
The negative relationship between government contracts and trade credit can be explained through two
channels: the direct channel from the characteristics of government contracts and the indirect channel
through the signaling role of public procurement. These findings have important policy implications for
Vietnam: Contracting with the government helps businesses reduce their dependence on trade credit by
switching to other cheaper financing sources, especially for enterprises whose financial statements are
certified by external auditors or enterprises with foreign investment