Credit Constraints and Determinants of the Cost of Capital in Vietnamese Manufacturing

This paper examines the extent to which borrowing constraints restrict firm access to credit and identifies individual, firm, and loan characteristics, which determine the cost of capital in Vietnamese manufacturing. Using direct information from a Vietnamese enterprise survey I show that 14 percent of the enterprises are credit constrained, and these enterprises would increase their debt holdings by 34 percent if borrowing constraints were relaxed. Moreover, it emerges that informal credit markets play an important role for fast growing firms. Enterprises do not appear to have the necessary time to go through the many administrative difficulties in the formal credit system if they want to "seize the day". Finally, collateralized loans face larger interest rates, explained by the significant influence of "policy lending" in Vietnamese credit markets.