Business

22 Apr 09

The researchers will carry out an in-depth investigation into how the credit crunch is hitting British businesses

Two Oxford economists have secured funding for a wide-ranging study into the impact of the credit crunch on firms, manufacturers, suppliers and shoppers in Britain.

In an 18-month study Dr John Thanassoulis and co-investigator Professor Volker Nocke, from the Department of Economics at Oxford University, will use theoretical modelling to carry out an in-depth investigation into how credit constrained firms can be expected to alter their dealings with their suppliers and retailers. They will also look at how the current restrictions on credit to firms are affecting customers.

Credit constrained firms cannot borrow all they need from external sources and so are dependent upon their current assets, that is their cash flow, to help fund investments. But this implies that business risk doesn't only lower profits today – it also reduces investment levels and so limits profits in the future. To try to avoid this, credit-starved firms will turn to their suppliers and retailers in an attempt to force them to shoulder more of the business risk. The natural way in which this can be achieved pushes retail prices up for the final consumer. 

Dr John Thanassoulis said: ‘Our first results show that this over-pricing effect is exacerbated when the interest rates at which firms can borrow rise. The tight credit market currently affecting many businesses in the UK not only means that firms are spending less on future investment, but that firms are manufacturing and producing less which pushes prices up for the consumer. This research underscores how important it is for everyone that access to credit is made easier for UK firms.’

Professor Nocke added: ‘Our analysis indicates that in times of tight credit, large, diversified retailers will charge lower prices to consumers rather than small, un-diversified retailers. This highlights the potential vulnerability of small and medium-sized enterprises to the current financial conditions.’

The study will examine which firms in the supply chain are the most vulnerable in the credit crunch – whether it is the manufacturers versus retailers or large diversified firms versus smaller, more focused ones. The research will explore whether asset-rich firms can exploit the current financial situation to impose less favourable terms, such as exclusive dealing requirements, on supply chain partners.

The researchers will also examine whether credit constrained firms are more likely to out-source or in-source operations; when they should seek risk-sharing partnerships and how such contracts should be structured.

The £70,000 funding award for ‘Credit Constraints, Firm Performance and Consumers’ was made by the Economics and Social Research Council. The research project will run from May 2009 to November 2010 with the first interim results expected in October 2009.