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Using a unique sample of small and medium-sized Italian firms, we investigate the effect of financial constraints on firms' participation in domestic and international supply chains. We find that firms more exposed to bank credit rationing and with weaker relationships with banks are more likely to participate in supply chains to overcome liquidity shortages. This benefit of supply chains is especially strong when firms establish long-term trading relationships and when they forge ties with large and international trading partners. To control for possible endogeneity of firms' access to credit, we construct instruments capturing exogenous shocks to the structure of the Italian local banking markets.
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... However, participation in international markets and global supply chains requires signifi cant fi nancial strength, which may deter SMEs from internationalising (Lu et al 2018;Greenaway et al 2007;Reddy and Sasidharan 2020). Participating in international markets can also signal creditworthiness that may improve access to fi nance (Minetti et al 2018), thereby reducing discouragement. While we cannot provide conclusive evidence on which of these two-way causal explanations dominates, we provide suggestive evidence that trade integration reduces the extent of discouragement among Indian SMEs. ...
... Small and young fi rms have shorter relationships with fi nancial institutions and are more likely to be fi nancially constrained (Han et al 2009;Chakravarty and Xiang 2013;Minetti and Zhu 2011). We also take into account fi rms' export activities, since participation in international markets can improve the likelihood of obtaining external fi nance (Minetti et al 2018) and vice versa (Gama et al 2017). ...
... It is possible that only those fi rms capable of undertaking certain costs associated with exporting can participate in international markets (Meltiz 2003), and that access to fi nance supports this. Equally, it is possible that participating in exports might positively affect fi rms' fi nancial health, thereby improving their chances of obtaining credit (Minetti et al 2018). We return to this issue shortly. ...
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... Existing research indicates that financing constraints are significant barriers to corporate investment (Conti et al., 2008;Lin, 2023). This effect is particularly evident in startup and manufacturing firms, where reduced investment adversely affects production and operations (Chandra & Long, 2013;Minetti et al., 2019). Such declines in investment not only disrupt transactions with upstream suppliers or downstream customers but also diminish operational performance (Yang, 2012), which ultimately threatens supply chain stability and security. ...
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Vertical integration involves expanding a firm’s business activities across multiple interconnected sectors, serving as a crucial strategy for securing scarce resources and strengthening core competitiveness. This study uses a difference-in-differences approach to examine whether and how tax reform that reduces value-added tax (VAT) rates affects corporate vertical integration. Using a sample comprising 21,356 firm-year observations from Chinese firms, the results reveal that VAT tax reform significantly enhances corporate vertical integration primarily by mitigating internal and external financing constraints. The effects of the tax reform are more pronounced among enterprises that are state-owned, in the manufacturing industry, that have high tax burdens or elevated debt levels, and those exposed to Sino-US trade conflicts. These results highlight that targeted tax strategies can effectively promote industrial development and reinforce supply chain resilience, especially during periods of deglobalization. These findings deepen our understanding of how fiscal policy shapes corporate behaviour and industrial structures.
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