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The Role of Fintech in Mitigating Information Friction in Supply Chain Finance

Author

Listed:
  • Lee, Hsiao-Hui

    (National Chengchi University)

  • Yang, S. Alex

    (London Business School)

  • Kim, Kijin

    (Asian Development Bank)

Abstract

Micro, small, and medium-sized enterprises in developing countries face severe financing difficulties, especially when trying to expand internationally. “Information friction” is a significant cause of this financing gap. Recent financial technologies (fintech) can improve supply chain finance efficiency. This paper therefore proposes a conceptual and analytical framework to study how fintech can close the financing gap by reducing information friction. We classify fintech into two categories: information processing technology (Type-A) and information collecting technology (Type-B) and find that both help close the financing gap by lowering the probability of misclassification of good firms as bad. Banks’ optimal Type-A investment increases in the bank’s size, profit margin, and the fraction of good firms in the market. They invest in Type-B if and only if the investment is sufficiently small. Due to “double marginalization,” a bank’s optimal fintech investment is lower than a socially optimal level, calling for mechanisms to incentivize or complement banks’ investment in fintech.

Suggested Citation

  • Lee, Hsiao-Hui & Yang, S. Alex & Kim, Kijin, 2019. "The Role of Fintech in Mitigating Information Friction in Supply Chain Finance," ADB Economics Working Paper Series 599, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:0599
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    References listed on IDEAS

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    1. Thomas Philippon, 2015. "Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," American Economic Review, American Economic Association, vol. 105(4), pages 1408-1438, April.
    2. S. Alex Yang & John R. Birge, 2018. "Trade Credit, Risk Sharing, and Inventory Financing Portfolios," Management Science, INFORMS, vol. 64(8), pages 3667-3689, August.
    3. Reindorp, Matthew & Tanrisever, Fehmi & Lange, Anne, 2018. "Purchase Order Financing: Credit, Commitment, and Supply Chain Consequences," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 90720, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    4. Christopher S. Tang & S. Alex Yang & Jing Wu, 2018. "Sourcing from Suppliers with Financial Constraints and Performance Risk," Manufacturing & Service Operations Management, INFORMS, vol. 20(1), pages 70-84, February.
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    Citations

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    Cited by:

    1. Tan, Changchun & Mo, Lingyu & Wu, Xiaomeng & Zhou, Peng, 2024. "Fintech development and corporate credit risk: Evidence from an emerging market," International Review of Financial Analysis, Elsevier, vol. 92(C).
    2. Wentao Hu & Xiaoxiao Li, 2023. "Financial Technology Development and Green Total Factor Productivity," Sustainability, MDPI, vol. 15(13), pages 1-28, June.
    3. Liu, Jingling & Chen, Yanying & Liang, Feng Helen, 2023. "The effects of digital economy on breakthrough innovations: Evidence from Chinese listed companies," Technological Forecasting and Social Change, Elsevier, vol. 196(C).
    4. Liu, Haiming & Hu, Jikong, 2024. "The impact of bank fintech on corporate debt default," Pacific-Basin Finance Journal, Elsevier, vol. 86(C).
    5. Qilong Cao & Jinglei Li & Hongru Zhang & Yue Liu & Xun Luo, 2022. "Blockchain and Firm Total Factor Productivity: Evidence from China," Sustainability, MDPI, vol. 14(16), pages 1-15, August.
    6. Yang, Shubo & Jahanger, Atif & Hossain, Mohammad Razib & Wang, Yanming & Balsalobre-Lorente, Daniel, 2023. "Enhancing export product quality through innovative cities: A firm-level quasi-natural experiment in China," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 462-478.
    7. Ding, Qiaoying & He, Wensheng, 2023. "Digital transformation, monetary policy and risk-taking of banks," Finance Research Letters, Elsevier, vol. 55(PB).
    8. Bi, Chen & Zhang, Baofeng & Yang, Feng & Wang, Yifan & Bi, Gongbing, 2022. "Selling to the newsvendor through debt-shared bank financing," European Journal of Operational Research, Elsevier, vol. 296(1), pages 116-130.
    9. Wang, Li & Huang, Yiting & Hong, Zhiwu, 2024. "Digitalization as a double-edged sword: A deep learning analysis of risk management in Chinese banks," International Review of Financial Analysis, Elsevier, vol. 94(C).
    10. Wang, Yichen & Hu, Jun & Chen, Jia, 2023. "Does Fintech facilitate cross-border M&As? Evidence from Chinese A-share listed firms," International Review of Financial Analysis, Elsevier, vol. 85(C).
    11. Zepu Zhang & Chen Sun & Jing Wang, 2023. "How Can the Digital Economy Promote the Integration of Rural Industries—Taking China as an Example," Agriculture, MDPI, vol. 13(10), pages 1-21, October.

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    More about this item

    Keywords

    artificial intelligence; digitization; fintech; information friction; supply chain finance;
    All these keywords.

    JEL classification:

    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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