Overview

Matched Vietnamese Enterprise Survey and customs data for 2016–2022 show that firm-year variation explains 37.45% of import and 25.02% of export letter-of-credit-use variation, versus 5.63% and 11.58% for country-product-year variation. The study then separates a cost channel, where scale and established status can reduce bank monitoring costs, from a screening channel, where ownership or experience can make direct trade safer. These are associations within a selected trading population, not rejection probabilities or universal causal effects.

Learning outcomes

In the Vietnamese study, firm-year variation explains more LC-use variation than country-product-year variation for both imports and exports.
Age, size, and productivity can lower bank costs, while ownership and experience can improve screening or access to alternatives.
Among traders, larger importers use LCs more often; after selection correction, the size relationship reverses in the broader firm population.

Keywords

Trade financeLetter of creditViet NamFirm sizeProductivitySelection

Why Firm Characteristics Change Access

This chapter examines the firm-level evidence behind uneven letter-of-credit use. The question is not whether large or old firms are simply “better,” but how age, size, productivity, ownership, and experience alter two different things: the cost for a bank to verify a transaction and the firm’s own ability to screen a foreign partner. That distinction lets us understand why younger, smaller, domestic, or first-time traders may face the greatest access barriers even when existing users look stronger on average.

Firm-level variation is the first fact

A bank does not approve an abstract trade corridor. It evaluates a transaction involving a particular importer or exporter, a particular product, and a particular partner. The CESifo study makes that unit of analysis visible through matched Vietnamese Enterprise Survey and customs data covering 2016–2022. After retaining firms with at least five employees, the study observes 36,596 exporters, 100,071 importers, and 241 partner markets. The underlying census contains roughly 517,000 to 756,000 formal firms per year, and the customs records identify payment modes for firm-product-partner activity.

This is a valuable setting because Viet Nam is deeply integrated into international trade, yet the data do not treat all traders as interchangeable. For each relevant firm and transaction grouping, the researchers can observe firm characteristics alongside whether a letter of credit was used. That makes it possible to ask how much of the difference in use is associated with the firm itself rather than with the product or country being traded.

The answer is substantial. In the study’s variance decomposition, firm-year variation explains 37.45% of the variation in letter-of-credit use for imports and 25.02% for exports. Country-product-year variation explains 5.63% for imports and 11.58% for exports. The paper summarizes the firm-level contribution as two to seven times more important than the country-product contribution, depending on the comparison.

These percentages are not a claim that country conditions do not matter. A weak legal system, scarce information, or limited bank liquidity can make intermediation valuable and difficult. The result says something more specific: even after considering the corridor and product, firms differ markedly in whether they use a letter of credit. A policy that expands the number of products or banks available in a market can therefore leave a large allocation problem untouched if it does not address how individual firms are assessed and supported.

The result also changes what “access” means. Firm-year variation is not the same as a bank rejecting a small firm. It includes differences in the firm’s demand, its payment relationships, its ability to use alternative finance, the scale and frequency of its transactions, and the bank’s terms. The decomposition tells us where the explanatory power is concentrated; it does not by itself identify which of those channels caused a particular firm to be excluded.

Published by DeepMox

FAQ

What does the Vietnamese firm study measure?

It measures whether firms used a letter of credit in reported trade flows, linking payment choice to firm, product, partner, and time characteristics; it does not observe every desired or rejected application.

Why can larger firms use more letters of credit?

Within the Vietnamese trading sample, greater scale can spread fixed monitoring costs and make bank intermediation more affordable, although larger firms may also have alternatives that reduce their need.

Why does the size relationship reverse after selection correction?

The correction broadens the comparison beyond firms already trading: larger traders may find LCs affordable, while smaller potential or first-time traders may depend more on bank intermediation when they can obtain it.

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Vietnamese Firms: Trade Finance and Letter-of-Credit Use

Why Firm Characteristics Change Access

Firm-level variation is the first fact

FAQ