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Do Trust-Based Relations Improve Firm’s Performance? Evidence from Transition Economies

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  • Berulava, George

Abstract

The purpose of this paper is to analyze the impact of trust-based relations on firm’s performance in transition economies. The trade credit variable is used as a proxy of trust-based relations and the propensity score matching method is employed to establish casual link between relational governance and business performance in the study. The research is conducted using data from a large survey of firms across 28 transition economies. The results of the study suggest that informal trust-based institutions of contract governance represent an important way for enhancing of business performance. To say distinctly, our findings indicate that in transition economies trade credits positively affect firms’ sales growth. They provide incentives for more intensive innovation activities and ensure higher labor productivity rates. The firms that trust their partners are characterized by larger proportions of reinvested profits as well. The main contribution of this paper is that it provides new empirical insights into the casual link between trust-based relations and business performance of firms in transition economies.

Suggested Citation

  • Berulava, George, 2013. "Do Trust-Based Relations Improve Firm’s Performance? Evidence from Transition Economies," MPRA Paper 48430, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:48430
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    References listed on IDEAS

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    1. John McMillan & Christopher Woodruff, 1999. "Interfirm Relationships and Informal Credit in Vietnam," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(4), pages 1285-1320.
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    3. Kevin Zheng Zhou & Laura Poppo & Zhilin Yang, 2008. "Relational ties or customized contracts? An examination of alternative governance choices in China," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 39(3), pages 526-534, April.
    4. Carlin Wendy & Schaffer Mark & Seabright Paul, 2004. "A Minimum of Rivalry: Evidence from Transition Economies on the Importance of Competition for Innovation and Growth," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-43, September.
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    8. Berulava George & Lezhava David, 2007. "The impact of trust on the mode of transaction governance between manufacturer and distributor," EERC Working Paper Series 07-05e, EERC Research Network, Russia and CIS.
    9. Simon Johnson & John McMillan & Christopher Woodruff, 1999. "Contract Enforcement in Transition," CESifo Working Paper Series 211, CESifo.
    10. Steer, Liesbet & Sen, Kunal, 2010. "Formal and Informal Institutions in a Transition Economy: The Case of Vietnam," World Development, Elsevier, vol. 38(11), pages 1603-1615, November.
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    Cited by:

    1. Papastamatelou Julie & Busch Rainer & Ötken Begüm & Okan Elif Y. & Gassemi Karim, 2016. "Effects of Network Capabilities on Firm Performance across Cultures," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 49(1), pages 79-105, March.

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    More about this item

    Keywords

    Keywords: trust-based relations; trade credit; networks; propensity score matching; business performance; transition economies;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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