An Empirical Analysis on the Effectiveness of Credit Risk Management in International Trade: Focusing on International Factoring

Abstract

Rapidly changing international trade environments entail various risks for small and medium-sized exporters. In particular, those risks associated with international trade payments, including credit risk, can directly impact an exporter's survival, indicating a crucial need for the effective management of such risks. However, most exporters prefer the letter of credit, which involves some serious problems, and thus requires effective and innovative international trade payment methods. This study provides a review of the literature on international factoring, which is selected mainly by exporters in developed countries, and investigates the relationship between international factoring and risk management. Based on a survey of 221 small and medium-sized exporters, the study employs risk awareness and expertise in int'l trade as determinants of the use of international factoring and provides an empirical analysis of the relationships between these determinants, adoption of international factoring, and export performance. According to the results, risk awareness and expertise in int'l trade had significant effects, not only on export performance, but also on the use of international factoring, indicating their pivotal roles in the adoption of international factoring. In addition, the adoption of international factoring fully mediated the relationships of risk awareness and expertise in int'l trade to export performance, implying that international factoring facilitated the effective credit risk management of international trade payments. Finally, the adoption of international factoring had a significant effect on export performance.