How Do Manufacturing Smes Obtain Loans In China? A Culture Embeddedness And Informal Institution Perspective

Despite their great contributions to the Chinese economy, large numbers of small and medium-sized enterprises (especially manufacturing SMEs) in China still face significant financing constraints. Due to the opacity of information disclosure, trusted accounting information is not common among small business and SMEs, so they are regarded by external lenders as comparatively risky enterprises, with the result that it is hard for them to obtain funding. This leads to the motivation of this research: if this is the real situation, then how do SMEs obtain loans in China? In order to address the research objectives, three rounds of fieldwork were conducted in eastern China from 2013 to 2015. A new research tool, the guanxi-oriented snowballing method was applied to find the research sample, participant observation was used and twenty in-depth semi-structured interviews were conducted to collect qualitative data. The interviewees comprised staff members of financial institutions (micro-credit company and banks), and manufacturing SME managers. The thematic analysis and Framework Analysis (FA) approaches were adopted to analyse the research data. Guanxi is a Chinese concept that could not only describe a social tie between people or businesses, but also be considered as a culture tradition, an informal rule and a very important social capital in China. A guanxi structure which contains three dimensions and four main features was used to explain and identify guanxi in this study. In addition, this research proposes a theoretical framework that contains elements of embeddedness theory and institution theory to frame guanxi. The research tries to improve the embeddedness theory by analysing guanxi from the aspects of it as both a strong tie and weak tie, and discuss the functions of guanxi as an informal rule in compensating formal institution deficiencies during the transition period of China. The research findings show that the level of trust in accounting information is very low in China, and indicate that the importance of financial reports may be attached only to the legitimacy they provide, rather than because they can provide very useful information. Given the situation that accounting information is inaccurate and invalid, the findings also show that non-financial information has greater validity in reflecting the true conditions of SMEs than do financial statements, and guanxi plays an essential role in the lending process; it is a “lubricant”, a ‘catalyst’ and a harmoniser. In conclusion, it is proposed in this thesis that SME lending is embedded in guanxi in China, which means guanxi could affect lending decision-making culturally, instrumentally and institutionally.