How much do cohesive and diversified networks improve financial access for small business?

Abstract

This paper draws on transaction cost theory and network literature to examine how entrepreneurial network facilitates financial access for small and medium-sized enterprises (SMEs) in Vietnam. We characterize four major types of entrepreneurial network and find that network effects vary significantly, depending on the network members to whom entrepreneurs connect. The cohesive network appears to have the most potent positive effect on firms’ financial access by motivating them to apply for formal and informal credit actively and increasing the likelihood of their applications being approved. The financial network benefits SMEs’ credit access from the supply side, reducing transaction costs and mitigating market frictions. The value of political network is higher in the informal credit market than the formal one. Although political and financial connections do not boost entrepreneurs’ motivation to seek funding from formal capital market due to cognitive bias, they improve firms’ chances to obtain long-term funds if requested. Lastly, the benefit of diversified network does exist, but its marginal effect on firms’ access to financial resources is too small to gauge any practical significance.