Research On Institutional Motivations And Economic Consequences Of The Local Supplier Preference

In the context of de-globalization,the supply-chain reshoring is occurring.In order to cope with the serious situation,China has emphasized the paramount importance of the improvement of the supply chain modernization,which indicates the urgency of the development of local supply chain.As the provider of resources,information,technology and services for enterprises,suppliers figure prominently in supporting for firms to cope with fierce market competition.Different from the western enterprises,the listed firms in China rely greatly on major suppliers,most of which are from the same region with the firm(The statistics show that over 70%of the A-share listed companies have at least one local supplier).In view of this phenomenon,it’s necessary to consider the characteristics of suppliers’ locality,and explores the motivation behind it and its economic consequences.Under China’s specific institutional background,this paper bases on the transaction theory,social capital theory,socially situated agency theory and the resource dependence theory,and follows the research framework of“relationship identification—resource acquisition—resource allocation" to investigate the motivation and the economic consequence of local supplier preferences.Specifically,this paper firstly investigates whether there exists a local bias in the matching of local suppliers to firms and explores the motivation behind it from the perspective of institution.Then the paper investigates the influence of local supplier preference on commercial credit and innovation.The improvement of the supply chain modernization depends on the optimization of industrial structure which relies greatly on technological innovation.In the fiercely competitive environment,rapidly changing market demands increase the uncertainty and complexity of innovation,so companies need to learn advanced technology from external organizations to prompt firm’s innovation capacity.Suppliers are an important learning source for corporate innovation.On the one hand,suppliers can provide technology embodied in products and transfer innovative knowledge to firms.On the other hand,the commercial trade credit that directly reflects the relationship between enterprises and suppliers plays a vital role in alleviating financial constraints in corporate innovation activities.Therefore,suppliers can contribute to corporate innovation by providing important resources.Hence this paper firstly explores the impact of local supplier preferences on commercial credit financing from the perspective of resource acquisition,and then studies its impact on innovation from the perspective of resource allocation to test whether the economic resources and technical resources provided by local suppliers have transferred to innovation capability efficiently.Main findings are as follows:Firstly,this paper empirically tests the existence of the business mode of local supplier preference of Chinese enterprises,and then analyzes the institutional motivation behind this phenomenon.Local preference not only reflects the proximity of spatial distance,but also reflects the proximity of social network distance,which implies that the counterparty faces a similar institutional environment.In China,the regionally differentiated administrative policies and cultural customs have created different economic ecology in different regions.In a relatively sealed environment,firms rely on regional social capital to form a relatively stable cooperative relationship with various stakeholders,so the business mode in China has obvious regional characteristics.The transaction between enterprises and local suppliers is also a form of embeddedness in the local social network,so the influence of the specific institutional environment can not be ignored.Combining the characteristics of China’s transitional economic system and relying on the theoretical framework of new institutional economics,this paper examines the formation of the business mode of the local supplier preference from the perspective of marketization and the Guanxi culture.The results show that Chinese listed companies are inclined to trade with local suppliers.This business mode is affected by both formal institutional factor and informal institutional factor.Specifically,the local supplier preference is more pronounced for firms located in provinces with lower degree of marketization and strong Guanxi culture.Further results show that the local supplier preference for enterprises will be weaken when the product market competition is higher;State-owned enterprises are inclined to trade with local suppliers to support the development of local industries;The relationship between the enterprise and its local suppliers is more stable.Secondly,this paper investigates the relation between firm’s local supplier preference and commercial credit from the perspective of resource acquisition.As an economic resource provided by suppliers,commercial trade credit directly reflects the degree of business relationship between the two parties.The literatures show that commercial credit is affected by the degree of information asymmetry and the level of trust.Enterprises and local suppliers are embedded in the local social network,which may lower the information asymmetry and strengthen the level of trust between them.Hence local suppliers may provide enterprises with more commercial credit financing.The results verify that firms with local suppliers get more commercial credit.Further evidence shows that the positive relation between firm’s local supplier preference and commercial credit is more pronounced for companies in provinces with lower degree of marketization and strong Guanxi culture.The research also suggests the lower information asymmetry and higher trust between the local suppliers and the firms are the two plausible mechanisms.What’s more,the analysis reveal that the impact of local supplier preference on commercial credit is more pronounced when the relation between local supplier and enterprise is more stable and when the firm faces higher financial constraints.Thirdly,this paper empirically examines the effect of firm’s local supplier preference on innovation from the perspective of resource allocation.Companies need to learn advanced technology from external organizations such as suppliers which can provide important resources to prompt firm’s innovation capacity.Hence the supplier’s resource capacity is an important factor to consider in the matching of suppliers.This paper concerns whether local supplier affect firm’s innovation activities.On the one hand,the embedded relationship between the two parties will promote information sharing and technical cooperation in the process of joint innovation.What’s more,local suppliers can contribute to corporate innovation by providing commercial credit.On the other hand,managers play an important intermediary role in promoting long-term cooperation between firms and local suppliers out of her short-sighted motive of maintaining the individual local social capital.When it comes to co-innovation,local suppliers are not the best one.The embedded relationship between the two parties will make it difficult for enterprises to seek other suppliers with strong capabilities,which is not conducive to the identification and acquisition of external novelty information and knowledge and ultimately will inhibit innovation.The results show that firms with local suppliers have a lower level of innovation.And the negative relation between local supplier preference and innovation is more pronounced for companies in province with lower marketization level and strong Guanxi culture.Further evidence shows that the agency problem is the main mechanism of the relation between local supplier preference and innovation.In addition,this paper investigates the potential mechanism of commercial credit,and finds that commercial credit does not significantly alleviate the negative relationship between local supplier preference and corporate innovation,which indicates that the commercial credit offered by local suppliers doesn’t effectively transform into corporate innovation due to the agency problem.Finally,in terms of the negative relation between local supplier preference and innovation,the paper tests the optimization mechanisms from the internal and external perspective.The results demonstrate that the internal corporate governance can effectively refrain the CEO’s self-interest motive to make the most of the business with local suppliers to maintain her personal social capital,thereby weakening the company’s preference for local suppliers and enabling the company to select suppliers with stronger innovation ability in a wider range.In terms of external mechanisms,it is found that convenient transportation facilities and regional integration policies can promote market integration,accelerate the cross-regional flow of product resources,and then promote cooperation between enterprises and nonlocal suppliers,and ultimately alleviate the negative effect of local supplier preference on innovation.This study has important theoretical value.First of all,this paper provides empirical evidence that institutional factors affect the formation of business relationship,and complements the literature of supplier selection.From the perspective of institutional constraints,this study explores the motivation of firm’s local supplier preference,and finds that the regional marketization level the Guanxi culture both affect the business model between the enterprises and local suppliers.Previous literatures on the determinants of supplier selection find that the delivery time and delivery cost are two important influencing factors,which are affected by the geographical distance between the enterprise and suppliers.This paper focuses on the locality of suppliers,which is different from geographic proximity that emphasizes the impact of spatial distance on information asymmetry.Locality refers to local embeddedness through business and social activities under the institutional environment.Therefore,in addition to the general transaction cost,the impact of the regional institutional factors on the locality of suppliers should also be considered.Our findings not only deepen the understanding of the impact of institutional environment on the formation of business relation,but also provide implications for government to optimize business environment for the development of supply chain system.Secondly,this paper extends the research on how supplier chain relationship affects corporate financial decisions.We follow the research framework of“relationship identification—resource acquisition—resource allocation" to investigate the motivation and the economic consequence of local supplier preferences,and find that firm’s local supplier preference has a positive impact on commercial credit but a negative effect on innovation,which helps to understand the different economic consequence of supplier characteristics.The prior literature mostly explored the impact of customer on corporate financial behavior,little concerned suppliers.A few scholars investigated the supplier concentration on corporate business activity.However,these studies assumed that the suppliers were homogeneous,ignoring the heterogeneity characteristics of suppliers,which may contribute to biased conclusions.As an important vendor evaluation criterion,the spatial distribution may have a significant impact on the transaction behavior between company and its suppliers.Hence the impact of the spatial distribution of suppliers on corporate financial behavior should not be ignored.This paper finds a new angle to reflect the extrinsic characteristics of suppliers by considering their spatial distribution in Chines special institutional environment and explores the impact of local suppliers on commercial credit and innovation,which provides implications for supply chain information disclosure and supply chain management.Thirdly,this paper enriches the related research on the effect of geographic distance on corporate financial behavior.The finance literature has mainly examined the influence of geographic distance between the enterprise and its stakeholders on corporate decision-making from the perspective of labor market,capital market and corporate governance.In the product market,a few scholars explore the impact of geographical proximity of customers and find that the proximity of the spatial distance reduces the information asymmetry between the enterprise and its customer,advances the information exchange and strengthens the customer’s monitoring role.However,scholars seldom focus on the economic consequence of the spatial distribution of suppliers.Under the institutional background of China,this paper specifically examines the motivation and economic consequences of the supplier locality of Chinese listed firms,which expands the research scope of the impact of geographic distance on corporate financial decision-making from the perspective of product market.Fourth,this paper enriches the study of geographic preference under the Chinese context from the perspective of local suppliers.Different from geographic proximity,geographic preference also reflects the culture of geographic relationship,which is different across regions.As an important social culture,geographic relationship plays a vital role in guiding the decision-makingl behavior of enterprises.Prior literature investigates the phenomenon of local preference from the perspective of local CEOs,local independent directors,local sponsor representatives,local auditors,local analysts and local media.This paper finds that the transaction between firms and local suppliers is also a manifestation of embeddedness in the local social network.As a kind of collateral,geographical location can strengthen the trust between enterprises and local suppliers and reduce information asymmetry,enabling relational transactions between the two parties.This finding expands the research on topics related to geographic preference.