Embeddedness In The Making Of SME Financing

Financing for medium-sized and small enterprises has always been the enduring topic especially for Zhejiang Province because several events such as entrepreneurs escaped or commit suicide on account of financial chain fracture in Wenzhou area. The problem of financing has become the key point of enterprises' survival. Bank credit and business credit are two crucial channels for medium-sized and small enterprises financing, especially in China. That is because these enterprises' small scale and information asymmetry restrict the possibility of acquiring capital through direct way such like stock market or trust bond.Lack of regulations and the high interest rate are the main problems of private loan, which triggered bankruptcy and a series of social problem. Under this circumstance, bank credit and business credit plays an important role and thus related researches are significant.Nowadays, academics have some researches about corporate finance based on perspective of embeddedness but without a systematic analysis. There are no researches combine both bank credit and business credit. This paper analyses influences of tie embeddedness and structural embeddedness on possibility and price for enterprises to obtain bank loan, and create the network transmission model to analyse effects of relationship between banks and enterprises on acquiring financing.This research presents some theoretical hypothesis of bank credit after the explorative analysis:Hypothesis1:how does embeddedness between banks and SMEs affect small and medium-sized enterprises obtain bank credit through different dimensions? Through exploratory case study, this study declares that the degree of business between enterprises and banks embedded in social relationships is associated with the possibility of enterprises acquire loan.Hypothesis2:How does the embeddedness affect the business credit management ability of small and medium-sized enterprises? Network transmission theory model is built to answer this question, embedded relationships between banks and SMEs will enhance banks unique capabilities and resources spillover to SMEs.Hypothesis3:The degree of business between enterprises and banks embedded in social relationships is associated with the cost of the loan. When the financial networks owned by an enterprise include both market relationships and embedded relationships, the possibility of obtaining loan is greater and the cost is lower than these enterprises which own only market relationships or embedded relationships. The size of a firm's bank network is negatively associated with the pro-portion of early trade credit discounts taken by the firm. The size of a firm's bank network is positively associated with the proportion of late payment penalties on trade credit incurred by the firm.Based on the theoretical framework, the quantitative data used in this study were obtained from questionnaires for medium-sized and small enterprises in Zhejiang Province. This paper use SPSS to do analysis of regression in order to discuss the influences of tie embeddedness and structural embeddedness on possibility and price for enterprises to obtain bank loan, and how relationships between banks and enterprises effect those enterprises to get business credit, some main conclusions are found:a) Tie embeddedness between enterprises and banks effect possibility and price for enterprises to obtain bank loan, b) The duration and degree of multiplexity in the bank-firm relationship obviously influence the cost of loan, c) Complementary bank networks (an enterprise network owns both market relationships and embedded relationships) increase the possibility of corporate finance. Complementary bank networks (an enterprise network owns both market relationships and embedded relationships) decrease the cost of corporate financing, d) Empirical test about network transmission theory presents that relationships between banks and enterprises affect business credit administration in those enterprises. Diversity of bank products and the duration of a bank-firm relationship are positively associated with enterprise's business credit administration ability. The number of bank relationships an enterprise owns is negatively associated with enterprise's business credit administration ability.These exploratory conclusions deepen understandings about mechanism of how embeddedness theory affects bank credit and business credit. This paper create the network transmission model which illustrates how informal trust and common cooperation expectations promotes resource transfers between acting subjects in networks, and reinforce resources and competence through enterprise ties which embedded in social ties and relationships. This is an important supplement to traditional theories such as the organization alliance and networks, the usage of formal management arrangement (mortgage, contract and contribution agreements to make sure resources transfer between enterprises). In dealing with the relationships between enterprises and banks, we think the investments for these relationships are not passive or improper. Actually, when confronted with the financial crises and risks, the networks between enterprises and banks help the survival of all the related enterprise in this network, and enhance the whole competitiveness. This paper takes the superiorities of embeddedness and marketization degree of enterprises and banks in China into consideration when dealing with the problem of relationships between enterprises and banks, presents the specificity of networks in corporate financing and open up a new perspective in researching medium-sized and small enterprises'financing theories. This study also raises suggestions of solving the problem of medium-sized and small enterprises' financing in a perspective of embeddedness, while states the shortcomings and further research directions.