Managing firm risk through supply chain

dependence: an SME perspective

Feng Liu
Business School, Shandong University, Weihai, China, and
Kwangtae Park
Korea University Business School, Seoul, Republic of Korea

Abstract
Purpose – The purpose of this study is to conduct an empirical investigation into the impact of supply chain dependence (including customer
dependence and supplier dependence) on credit risk through the lens of social network theory (SNT) by focusing on how to manage firm risk using
supply chain relationships in the context of Chinese small and medium-sized enterprises (SMEs).
Design/methodology/approach – Using data from public databases, this study selects a unique sample from a Chinese SME board and uses an
ordered logistic regression model to investigate the relationship between the dependence on major customers or suppliers and both credit risk and
credit rating. It is found that the results are robust to the use of different empirical methods.
Findings – The main findings of this study are that a firm’s dependence on major customers is positively related to its credit risk but negatively related to
its credit rating, while a firm’s dependence on major suppliers is positively related to its credit risk but negatively related to its credit rating.
Originality/value – To broaden the understanding of industrial marketing and purchasing, this study contributes to research on supply chain
relationship management and risk management by focusing on SMEs’ dependence on major customers and suppliers and empirically examining the
influence of this dependence on both credit risk and credit rating in an emerging market.
Keywords Customer dependence, Supplier dependence, Credit risk, Credit rating, SMEs
Paper type Research paper

1. Introduction dependence (i.e. customer dependence and/or supplier

dependence) on the performance of large companies in mature
Managing relationships with major suppliers and customers is markets. However, few studies have focused on the customer
one of the most important concerns for all firms; thus, it has and supplier dependence of small and medium-sized
attracted significant attention from both industry and enterprises (SMEs) or on the influence of these forms of
academia. According to the Industrial Marketing and
dependence on firm risk in emerging markets.
Purchasing Group, buyer–supplier relationships can affect
According to the National Bureau of Statistics in China, the
various business management and industrial markets
number of SMEs in China in 2018 fell by 6,494 compared with
(Håkansson and Snehota, 2000; Johnsen, 2018; Möller and
2017, the first such fall since 2011. In emerging markets, most
Halinen, 2018; Song et al., 2012; Turnbull, 1990). A firm
SMEs suffer great uncertainty; thus, how to enhance their
needs to maintain a sustainable relationship with its customers
survival prospects is a serious issue for both the government of
to sell more products or services while working closely with
China and small business managers. For this purpose, credit
suppliers to ensure a reliable source of raw and processed
risk (via credit rating), a common indicator for potential
materials. In recent decades, customer and supplier
bankruptcy, was used in this study. Although SMEs are one of
dependence, i.e. the extent to which a local firm relies on a few
the most active economic units in the national economy, their
major customers or suppliers for financial resources (Elking
failure rate is very high because of their vulnerable supply chain.
et al., 2017; Kim and Zhu, 2018; Patatoukas, 2011;
By investigating customer and supplier dependence for
Schwieterman et al., 2018; Tangpong et al., 2008), has been an
different entities and markets, the present study is designed to
important subject of interest in accounting (Dhaliwal et al.,
fill this gap and investigate the link between customer and
2016; Patatoukas, 2011), marketing (Saboo et al., 2017) and
supplier dependence and firm risk among Chinese SMEs in
supply chain research (Elking et al., 2017; Kim and Zhu, 2018;
Kim, 2017; Schwieterman et al., 2018). As shown by Table 1, bond markets. Therefore, by investigating customer and
most studies have investigated the effect of supply chain
The authors acknowledge the help of Professor Jaehwan Kim, Professor Shufeng
(Simon) Xiao and Professor Jian Xu regarding insights and feedback provided on
earlier versions of the article. They also express thanks to Guest Editor, Dr Fawaz
The current issue and full text archive of this journal is available on Emerald Baddar ALHussan and all anonymous referees for their valuable comments. This
Insight at: https://www.emerald.com/insight/0885-8624.htm work is supported by Korea University Business School Research Grant.

Received 29 May 2019

Journal of Business & Industrial Marketing
Revised 14 October 2019
36/12 (2021) 2231–2242 21 January 2020
© Emerald Publishing Limited [ISSN 0885-8624] 17 March 2020
[DOI 10.1108/JBIM-05-2019-0229] Accepted 9 April 2020

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 Table 1 Representative studies on supply chain dependence

Social
Customer Supplier network
Author dependence dependence Dependent variable theory Sample Data source Summary of relevant findings
Feng Liu and Kwangtae Park

Patatoukas (2011) Yes No Firm profitability No US public companies Compustat There is a positive association between customer dependence
and accounting rates of return
Supply chain relationships and credit risk

Dhaliwal et al. (2016) Yes No Cost of equity No US public companies Compustat Companies with a higher degree of customer dependence
have a higher cost of equity
Campello and Gao Yes No Loan failure and loan No US manufacturing public Compustat Higher levels of customer dependence result in a series of
(2017) spreads companies loan contract issues, such as increases in both loan failure
and loan spread
Kim (2017) Yes No Firm profitability Yes US public companies Compustat Customer dependence negatively affects firm profitability
Krolikowski and Yuan Yes No R&D intensity and No US public companies Compustat Customer dependence is positively related to R&D intensity

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(2017) innovation intensity and innovation intensity
Saboo et al. (2017) Yes No Firm profitability and No US public companies Compustat Customer dependence positively influences market
market capitalization capitalization but negatively affects firm profitability
Hui et al. (2018) Yes No Firm profitability No US public companies Compustat Customer dependence positively affects a supplier firm’s
profitability
Kim and Zhu (2018) Yes No R&D intensity Yes US public companies Compustat Customer dependence is positively associated with R&D
intensity
Schwieterman et al. Yes Yes Credit rating No US public companies Bloomberg The association between customer dependence and credit
(2018) rating is positive and significant, but there is no significant
relationship between supplier dependence and credit rating
Volume 36 · Number 12 · 2021 · 2231–2242
Journal of Business & Industrial Marketing
 Supply chain relationships and credit risk
Feng Liu and Kwangtae Park
supplier dependence for different entities and markets, the
present study is designed to fill this gap and investigate the link
between customer and supplier dependence and firm risk
among Chinese SMEs in bond markets.
The position of SMEs in bond markets is an important topic
to address. As a way to access capital for many listed companies,
bond markets are especially important for firm survival (Kim
et al., 2017); however, the number of bond markets available for
small businesses is much lower than that for large companies. To
investigate the performance of SMEs in bond markets, we use a
credit risk rating database and use credit risk as a measurement
of firm risk. Credit risk represents the potential loss resulting
from the non-payment of loans, receivables or other lines of
credit (Chen et al., 2010); therefore, it acts as an essential
indicator for potential SME bankruptcy prediction. Generally,
credit risk arises whenever a borrower expects to use future cash
flows to pay for current debt. In terms of a supply chain, credit
risk can be considered the risk arising from the damage that
occurs when customers or suppliers fail to complete transactions
or otherwise meet their contractual obligations (Gaonkar and
Viswanadham, 2007; Xu et al., 2017). Research to date has
tended to focus on credit risk management for large corporations
rather than SMEs, though there are many differences between
the two groups. Moreover, because SME credit rating databases
are rare, how supply chain relationships affect the credit rating of
SMEs is not obvious ex ante. In this study, we thus seek to
investigate the effect of the dependence on major customers and
suppliers on the credit risk of SMEs.
The dependence on a few major customers and/or suppliers
has long been a subject of debate in both industry and
academia. According to industry views, dependence (which is
referred to as concentration) is conventionally considered to be a
risk factor for corporate operations in business practice (Marin,
2018; Shaffer, 2015; Stabler, 2018). However, a recent study
on the causal link between dependence and credit risk by
Schwieterman et al. (2018) initially proposed that both the
customer and supplier dependence of a focal firm would have a
positive impact on its credit rating; however, their results
indicated that credit rating had a positive and significant
relationship only with customer dependence and not supplier
dependence. Although they found evidence that credit risk can
be managed through supply chain relationships – in particular
major customer relationships – their conclusions are
inconsistent with industry views. Furthermore, based on the
portfolio theory, companies with a high customer dependence,
which exposes the firm to the idiosyncratic actions of their
major clients, are more vulnerable to risk than those that have a
variety of customers (Saboo et al., 2017). Furthermore,
Dhaliwal et al. (2016) argued that a company with a more
concentrated customer base increases its risk because of a
higher cost of equity. To extend the understanding of supply
chain dependence on a few main business partners, we use
social network theory (SNT) to develop a theoretical
conceptualization of the relationship and attempt to provide
more evidence for this open empirical question.
This study contributes to the understanding of supply chain
relationship management and risk management in several ways
by exploring the concept of dependence on a few major
customers and/or suppliers and empirically examining the
influence of this customer and supplier dependence on the
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Volume 36 · Number 12 · 2021 · 2231–2242
credit rating of Chinese SMEs. Risk management related to
firm survival and bankruptcy is of extreme importance for
SMEs; our study provides important information for SME risk
control and mitigation. This study fills a gap in the literature to
examine how an SME’s dependence on customers and
suppliers influences its risk by analyzing empirical evidence
from an emerging market. While previous research on both
upstream and downstream markets has primarily focused on
large companies, this study explores Chinese SME networks of
major customers and/or suppliers and their impact on credit
risk and credit bonding.
This study contributes to the debate over the dependence on
a few major customers or suppliers by providing new evidence
for its effect on credit risk based on SME data. Schwieterman
et al. (2018) argued that “there is support for both positive and
negative effects of customer and supplier dependence;” thus,
our study attempts to clarify this by investigating different
entities in a different context using a much larger dataset. We
found an SME’s dependence on major customers is positively
related to its credit risk but negatively related to its credit rating.
This results conflicts with previous research, which has
suggested that the customer dependence of large companies
has a negative association with credit risk. This study thus
further illuminates the relationship between customer
dependence and firm risk in terms of the downstream market
characteristics of SMEs. We also found that an SME’s
dependence on major suppliers is positively related to its credit
risk but negatively related to its credit rating. To the best of our
knowledge, this is the first study to provide empirical evidence
for the significant impact of supplier dependence on credit risk.
Finally, our findings will help business and management
researchers to understand the dependence on major customers
or suppliers and provide new insights for SME operators in
terms of managing firm risk through supply chain relationships.
2. Literature review
To develop our theoretical arguments in this research regarding
customer relationship management (CRM) and supplier
relationship management (SRM), we adopted SNT. SNT
posits that a firm’s management decisions, economic behavior
and financial performance generally depend on the influence of
the embedded social context (Burt, 2009; Connelly et al., 2013;
Granovetter, 1985; Gulati, 1998; Kim, 2017; Uzzi, 1997).
Based on this theory, the two strategies available for controlling
the uncertainty of social relationships are strong ties and weak
ties; the former strategy refers to inter-firm associations that are
tightly coupled, while the latter strategy refers to inter-firm
associations that are looser (Granovetter, 1973; Ketchen and
Hult, 2007; Reimann and Ketchen, 2017). When applying this
perspective to supply chain relationship management, higher
dependence can be considered an indicator of strong ties, while
lower dependence reflects weak ties. It has been reported that
weak ties are more effective in mobilizing resources than strong
ties (Borgatti and Li, 2009; Granovetter, 1973). Accordingly,
as characteristics related to the strength of the ties between
firms in a social network, customer and supplier dependence
affect the exchange of resources, information, products and
services in a supply chain, thus influencing financial outcomes.
 Supply chain relationships and credit risk Journal of Business & Industrial Marketing
Feng Liu and Kwangtae Park Volume 36 · Number 12 · 2021 · 2231–2242

Drawing on two concepts from operations strategy, this study market of China and SMEs and hold somewhat different
investigates supply chain dependence (including customer expectations, as discussed in the next section.
dependence and supplier dependence) to explore the
characteristics and dimensions of major customer and supplier 3. Hypothesis development
relationship management (Dhaliwal et al., 2016; Elking et al.,
By adopting SNT, we developed a research framework
2017; Kim and Zhu, 2018; Schwieterman et al., 2018). Table 1
underlying the conceptual model for managing firm risk via
summarizes the representative empirical literature on customer
supply chain dependence, and then proposed our hypotheses
and supplier dependence; the focus has been on outcomes such
about the relationships between customer dependence,
as firm profitability, R&D intensity and market profitability.
supplier dependence, credit risk, and credit rating (Figure 1).
Most of these studies have focused on the role of customer
In this study, we focused on the strength of an SME’s ties, i.e.
dependence within US public companies, while the outcomes
the extent to which an SME is connected to its main partners in
of supplier dependence in SMEs have received less attention.
the supply chain. Key arguments in the SNT studies in support
To fill this gap, this study seeks to investigate the relationships
of that a supply chain network composed of weak ties seems to
between customer dependence, supplier dependence and firm
span more structural holes than a supply chain network of
risk for SMEs in an emerging economy.
strong ties, gain more information benefits and thereby mitigate
As mentioned in the Introduction, customer and supplier
firm risk (Borgatti and Li, 2009; Burt, 2009; Granovetter,
dependence refer to the extent to which a local firm relies on a
1973).
few major customers or suppliers for financial resources
This study proposes that dependence on major customers or
(Elking et al., 2017; Kim and Zhu, 2018; Patatoukas, 2011;
suppliers has a positive effect on credit risk and a negative effect
Schwieterman et al., 2018; Tangpong et al., 2008).
on credit rating for three reasons. First, dependence on a few
Specifically, customer dependence, the degree to which a
customers or suppliers can have a significant impact on loan
focal firm sells products or services to its major clients, i.e.
contract terms, which are closely related to credit risk. For
those who account for a major share of the company’s total
instance, Campello and Gao (2017) proposed that companies
sales, is a component of the CRM strategy of suppliers,
with higher customer dependence face loan contract problems
related to the decision whether to cater to a few major
such as a high loan failure rate and loan spread. Similarly, Yang
customers or to seek a more diverse customer base. However,
(2017) reported that companies with a high dependence on
supplier dependence, as a component of the SRM strategy, is
major customers have higher loan spread and shorter loan
the degree to which a focal firm purchases materials or maturity. Accordingly, firms with higher dependence are likely
services from major suppliers. As shown in Table 1, two main to experience a higher rate of loan failures.
dimensions have been investigated in empirical research on Second, dependence on major customers or suppliers
customer and supplier dependence: increases uncertainty, thus exposing a firm to the risk of supply
1 Performance, in which most studies have found that chain disruption. For instance, Irvine et al. (2015) argued that
customer dependence is associated with firm profitability, dependence on major customers affects demand uncertainty.
although the strength of this association varies (Hui et al., They reported that companies with a high level of customer
2018; Kim, 2017; Patatoukas, 2011; Saboo et al., 2017); dependence exhibit a correspondingly higher demand
and uncertainty compared to those with a diversified customer
2 Risk, in relation to which Dhaliwal et al. (2016) claimed base. Similar to customer dependence, we believe that higher
that companies with higher customer dependence have a dependence on a few key suppliers will increase supply
higher cost of equity. uncertainty. Indeed, Wagner and Bode (2006) reported that
Campello and Gao (2017), who investigated public US both dependence on major customers and suppliers and the
manufacturing companies, found that higher customer level of single sourcing are factors related to supply chain
dependence results in loan contract problems such as increases uncertainty and risk; thus, we consider that customer and
in both loan failure and loan spread. supplier dependence would have an adverse effect on a firm’s
Credit risk refers to the risk arising from customers or credit rating.
suppliers failing to complete transactions or otherwise meet
their contractual obligations in terms of the supply chain Figure 1 Conceptual model and hypothesis development
(Gaonkar and Viswanadham, 2007; Xu et al., 2017), whereas
credit ratings remain the most common and extensively used
measure for assessing corporate credit risk and quality. In this
study, we are interested in the management of firm risk through
supply chain relationships, an association that has been
highlighted by previous studies. For instance, Chen et al.
(2011) argued that a firm’s credit risk can be affected by the
internal liquidity risk of its customers and suppliers. Our study
is similar to that of Schwieterman et al. (2018), except that they
targeted large US companies and proposed that both customer
and supplier dependence can significantly contribute to the
reduction of credit risk, whereas we consider the emerging

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 Supply chain relationships and credit risk
Feng Liu and Kwangtae Park
Third, the liquidity of credit risk shocks is considerably
influential for firms that have a higher dependence on major
customers and suppliers. Chen et al. (2013) proposed that the
internal liquidity risk of a firm’s suppliers and customers
influences its credit risk rating; however, Saboo et al. (2017)
argued that companies with a high customer dependence are
exposed to the idiosyncratic actions of major clients, making
them more vulnerable than a firm with a wide variety of
customers. Thus, if a firm sells a larger percentage of products
or services to its primary customers and purchases most of its
resources from a few major suppliers, the liquidity of credit risk
shocks from the damage arising from customers or suppliers
failing to meet their contractual obligations is more serious.
Therefore, the unexpected non-fulfillment of contracts with
major customers or suppliers threatens the supply chain and
increases the chances of bankruptcy.
In this study, we focused on customer and supplier
dependence in the context of SMEs in an emerging market.
Low dependence, which reflects weak ties within a business
network, is more effective for mobilizing resources; therefore,
we posit that dependence on major customers or suppliers is
positively associated with credit risk but negatively associated
with credit rating.
H1. A firm’s dependence on major customers is positively
related to its credit risk (H1a) but negatively related to its
credit rating (H1b).
H2. A firm’s dependence on major suppliers is positively
related to its credit risk (H2a) but negatively related to its
credit rating (H2b).
4. Empirical analysis
4.1 Sample and data
To investigate whether supply chain dependence affects credit
risk and credit rating, a unique sample from The New Third
Board Market [1] (an SME board) in China was used. We
obtained data from two independent databases. Financial
indicators (such as customer dependence, supplier
dependence, total assets and sales growth) for 2016 were
obtained from the Choice database, which is a commonly used
data source for Chinese firms in management research. In
2017, credit risk and credit rating data (in the form of credit risk
rating) based on the market performance of SMEs were
collected from Chinaeval Credit, an independent third-party
credit rating agency, on March 11, 2019.
Our sample was collected from a total of 7,879 Chinese firms
that had an IPO in the New Third Board Market during the
2006–2016 period. After data processing, this sample was
reduced to 7,548 SMEs for further analysis. Because the focus
of this study was SMEs, we removed the data from 331 firms
that developed into large companies in the bond market during
this period. Moreover, we matched the financial indicators and
credit risk ratings based on the same stock code, while all
variables using in the analysis were winsorized at 1% and 99%
(Wilcox, 2003) to reduce the potential bias because of spurious
values or outliers. The overall characteristics of the sample are
summarized in Table 2.
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Volume 36 · Number 12 · 2021 · 2231–2242
4.2 Dependent variables
4.2.1 Credit risk
We used a credit risk rating with nine categories, with AAA-related
suppliers assigned a credit risk value of 1 and suppliers with ratings
of C assigned a value of 9 (Crouhy et al., 2000). In other words,
lower values represented firms with a lower credit risk.
4.2.2 Credit rating.
Because some of the nine credit risk categories contain too few
bonds, the credit risk rating data was pooled into three
categories: AAA to A (High), BBB to B (Medium) and CCC to
C (Low). A to AAA firms were assigned a credit rating value of
2, firms with ratings of B to BBB were assigned a value of 1 and
those from C to CCC were assigned a value of 0 (Cremers et al.,
2008; Jorion et al., 2005).
4.3 Independent variables
4.3.1 Customer dependence.
Was measured using the Herfindahl–Hirschman index
according to the proportion of a firm’s total sales to its five
largest customers by sales volume. In line with previous studies
(Kim, 2017; Saboo et al., 2017; Schwieterman et al., 2018), the
calculation used was as follows:
 2
X
n Xn
Salesj
Customer dependence ¼ ðSharej Þ ¼
2
;
i¼j i¼j
Sales
where Sharej is the firm’s proportion of sales to main customer j
(j = 1,2,  ,n), and Salesj and Sales represent the firm’s sales to
customer j and its total sales, respectively. Here j = 5, which
means the five largest customers were considered.
4.3.2 Supplier dependence
Was measured using the Herfindahl–Hirschman index based
on the proportion of purchases from the firm’s five largest
suppliers. Consistent with Schwieterman et al. (2018), the
following calculation was used:
 2
X
n Xn
Purchasej
Supplier dependence ¼ ðSharej Þ2 ¼ ;
i¼j i¼j
Purchase
where Sharej is the firm’s proportion of purchases from main
supplier j (j = 1,2,  ,n), and Purchasej and Purchase represent
the firm’s purchases from supplier j and its total purchases,
respectively. We include up to the top five suppliers, thus, j = 5.
4.3.3 Control variables
To isolate marginal effects in the analysis, we selected several
control variables related to bond and firm characteristics: time
since IPO, firm age, firm size, profit, sales, sales growth,
leverage and R&D investment. The outcome variables may be
influenced by these control variables, which were selected from
the literature (Jiang et al., 2012; Kim et al., 2017; Schwieterman
et al., 2018). We measured time since IPO as the number of
years because the IPO for the focal firm in the bond market,
firm age as the number of years since the firm’s establishment,
firm size as the natural logarithm of the total assets for the firm,
profit as the firm’s operating income divided by total assets,
sales as the firm’s sales, sales growth as the increase or decrease
 Supply chain relationships and credit risk Journal of Business & Industrial Marketing
Feng Liu and Kwangtae Park Volume 36 · Number 12 · 2021 · 2231–2242

Table 2 Characteristics of the sample

Variables N Unit Mean SD Minimum Maximum
Control variables
Time since IPO 7,548 Years 3.74 0.90 3.00 7.00
Firm age 7,548 Years 13.68 4.73 6.00 27.00
Total assets 7,542 Million dollars 22.55 28.91 1.05 180.33
Ln (total assets) 7,542 – 2.54 1.08 0.12 5.19
Profit 7,542 Ratio 0.02 0.16 0.78 0.32
Sales 7,539 Million dollars 16.07 20.68 0.40 128.81
Sales growth 7,523 Ratio 0.23 0.58 0.72 3.19
Leverage 7,542 Ratio 0.39 0.20 0.03 0.88
R&D investment 6,823 Million dollars 0.81 0.91 0.00 5.30
Key variables
Customer dependence 7,530 – 0.34 0.28 0.00 1.00
Supplier dependence 7,449 – 0.34 0.26 0.02 1.00
Credit risk 7,247 Rating 4.34 1.75 2.00 9.00
Credit rating 7,247 Rating 1.25 0.68 0.00 2.00

in the firm’s sales over the previous year, leverage as the ratio of
the firm’s debt to its total assets and R&D investment as the
R&D expenses of the firm. In addition, an industry dummy was
included as a control variable.
Finally, to mitigate reverse causality and address endogeneity
concerns, a time lag of one year was established between the
dependent and independent variables as recommended by
previous research (Kim and Zhu, 2018; Kim, 2017;
Patatoukas, 2011). As such, the data for the two dependent
variables (credit risk and credit rating) was collected from the
market performance of the SMEs in 2017, while the data for
the explanatory variables was collected for 2016.
4.4 Analysis
Ordered logistic regression (Ologit) was used to analyze the
cross-sectional data and test the two hypotheses of this study.
Traditionally, Ologit is a qualitative choice model that is
appropriate when the dependent variable is categorical and
ordered (Amemiya, 1981) similar to the case with credit risk and
credit rating in the present study. In Ologit, an underlying score
is estimated as a linear function of the independent variables and
a set of cut points. Using Ologit, we could explore the
determinants of firm risk and estimate the relationships between
the independent (customer dependence and supplier
dependence) and dependent variables (credit risk and credit
rating). Before the regression analysis, correlation analysis was
conducted first, with Table 3 showing that all of the independent
variables had a significant correlation with either credit risk or
credit rating based on their Pearson’s correlation coefficients.
The results for credit risk and credit rating based on Ologit are
summarized in Tables 4 and 5, respectively. For a test of
robustness, we used ordinary least square (OLS) and Tobit
regression models using the same data. Table 6 confirms that the
results were robust and not driven by the choice of model.
5. Results
5.1 Main results
The Ologit results for credit risk as the dependent variable are
presented in Table 4. Model 1 revealed a positive and
significant association between customer dependence and
credit risk ( b = 0.9871, p < 0.01), generating support for H1a.
In Model 2, the effect of supplier dependence was found to be
significant and positive ( b = 0.2292, p < 0.05), which
supported H2a.
The Ologit results for the effect on credit rating are presented
in Table 5. Model 3 found a strong negative statistical
association between customer dependence and credit rating
( b = –1.0140, p < 0.01), generating support for H1b. In Model
4, the effect of supplier dependence was found to be significant
and negative ( b = –0.2475, p < 0.05), which supports H2b.
To investigate the impact of changing independent variables
by one unit on the probability of dependent variables, we
plotted the average marginal effects of customer and supplier
dependence after the Ologit model using marginscontplot
(Royston, 2013). The marginal effects of independent variables
after the Ologit model on the probability of dependent variables
were computed based on the guidelines reported by Williams
(2014). As shown in Figures 2 and 3, the negative slope
indicates that the average marginal effects on the probability of a
predicted low credit risk (i.e. credit risk = 2) gradually decreased
as customer and supplier dependence increased. Moreover, the
marginal effects of customer and supplier dependence on the
probability of the low credit risk were negative and significant
(customer dependence: dy/dx = –0.0627, p < 0.01; supplier
dependence: dy/dx = –0.0192, p < 0.01). Thus, a one-unit
increase in customer dependence was associated with a 6.27%
reduction in the probability of the low credit risk, while a one-
unit increase in supplier dependence was associated a 1.92%
reduction in the probability of the low credit risk.
The positive slope of the marginal effects on the probability of
a predicted low credit rating (i.e. credit rating = 0) observed in
Figures 4 and 5 indicates that a higher customer or supplier
dependence led to a decrease in credit rating. We also found that
the marginal effects of customer and supplier dependence on the
probability of the low credit rating were positive and significant
(customer dependence: dy/dx = 0.0805, p < 0.01; supplier
dependence: dy/dx = 0.0231, p < 0.01). In other words, a one-
unit increase in customer dependence was associated with an
8.05% higher likelihood of the low credit rating, and a one-unit

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Feng Liu and Kwangtae Park Volume 36 · Number 12 · 2021 · 2231–2242

Table 3 Pearson’s correlation matrix

Variables 1 2 3 4 5 6 7 8 9 10 11 12
1 Time since IPO 1
2 Firm age 0.1493 1
3 Ln (total assets) 0.1957 0.2146 1
4 Profit 0.0147 0.0912 0.3405 1
5 Sales 0.0788 0.1340 0.6312 0.2120 1
6 Sales growth 0.0574 0.1527 0.0093 0.2110 0.0702 1
7 Leverage 0.1038 0.0249 0.2028 0.1664 0.2067 0.0070

1
8 R&D investment 0.1892 0.1308 0.5057 0.0825 0.4888 0.0336 0.0121 1
9 Customer dependence 0.0506 0.1594 0.1728 0.0792 0.1669 0.0041 0.0177 0.1352 1
10 Supplier dependence 0.0343 0.1559 0.1728 0.0775 0.1254 0.0509 0.1137 0.1402 0.2516 1
11 Credit risk 0.0210 0.1008 0.2138 0.4964 0.1345 0.1301 0.3482 0.1641 0.1773 0.0686 1
12 Credit rating 0.0115 0.0814 0.1948 0.4383 0.1250 0.1240 0.3535 0.1674 0.1683 0.0487 0.9086 1
Note:  p < 0.05

Table 4 Ordered logistic regression analysis for the association of Table 5 Ordered logistic regression analysis for the association of
customer dependence and supplier dependence with credit risk customer dependence and supplier dependence with credit rating
Dependent variable: Credit risk Dependent variable: Credit rating
Independent variables Model 1 Model 2 Independent variables Model 3 Model 4
Constant cut 1 1.6432 2.0716 Constant cut 1 3.8592 3.3745
Constant cut 2 0.5658 0.1266 Constant cut 2 0.6622 0.2066
Constant cut 3 2.0284 1.5769 Time since IPO 0.2370 (0.030) 0.2282 (0.010)
Constant cut 4 2.7921 2.3342 Firm age 0.0103 (0.006) 0.0157 (0.006)
Constant cut 5 3.6858 3.2226 Firm size 0.1777 (0.039) 0.1808 (0.039)
Constant cut 6 4.8156 4.3390 Profit 5.7224 (0.228) 5.7846 (0.231)
Constant cut 7 5.8211 5.3436 Sales 0.0081 (0.002) 0.0091 (0.002)
Time since IPO 0.2234 (0.027) 0.2146 (0.027) Sales growth 0.2278 (0.050) 0.2314 (0.051)
Firm age 0.0141 (0.005) 0.0193 (0.005) Leverage 4.1167 (0.153) 4.1587 (0.154)
Firm size 0.1733 (0.034) 0.1751 (0.035) R&D investment 0.1393 (0.040) 0.1499 (0.040)
Profit 6.2152 (0.195) 6.2740 (0.197) Customer dependence 1.0140 (0.098)
Sales 0.0071 (0.002) 0.0080 (0.002) Supplier dependence 0.2475 (0.108)
Sales growth 0.2216 (0.044) 0.2309 (0.044) Industry dummy Yes Yes
Leverage 3.8496 (0.132) 3.8886 (0.134) Observations 6,538 6,483
R&D investment 0.1222 (0.035) 0.1369 (0.035) LR chi2 (19) 2654.84 2556.19
Customer dependence 0.9781 (0.086) Prob > X2 0.0000 0.0000
Supplier dependence 0.2292 (0.094) Pseudo R2 0.2054 0.1996
Industry dummy Yes Yes
Notes: Robust standard errors in parentheses. A likelihood ratio chi-
Observations 6,538 6,483
square of 2654.84 with a p-value of 0.0000 and a likelihood ratio chi-
LR chi2 (19) 3224.41 3110.88
square of 2556.19 with a p-value of 0.0000 for Model 1 and Model 2,
Prob > X2 0.0000 0.0000
respectively, indicate that our model as a whole is statistically
Pseudo R2 0.1353 0.1317
significant compared to the null model with no predictors;  p < 0.1;  p <
Notes: Robust standard errors in parentheses. A likelihood ratio chi- 0.05;  p < 0.01
square of 3224.41 with a p-value of 0.0000 and a likelihood ratio chi-
square of 3110.88 with a p-value of 0.0000 for Model 1 and Model 2,
and both credit risk and credit rating produced the same results
respectively, indicate that our model as a whole is statistically significant
compared to the null model with no predictors;  p < 0.05;  p < 0.01 as for the Ologit model, as did the results for the Tobit model.
Thus, it can be concluded that the results are robust to the
choice of model and that the findings still hold true.

increase in supplier dependence was associated with a 2.31%

higher likelihood of the low credit rating. 6. Discussion
Adopting SNT as a guiding theoretical lens, our work builds on
5.2 Robustness test previous literature related to industrial marketing and
The results for the robustness test using the OLS and Tobit purchasing, supply chain management, operations
models are presented in Table 6. The use of the OLS model to management and corporate finance. The present study was
investigate the link between customer and supplier dependence designed to determine the associations between supply chain

2237
 Feng Liu and Kwangtae Park

Table 6 Ordinary least squares regression and tobit regression analyses for the relationships among customer dependence, supplier dependence, credit risk, and credit rating
Supply chain relationships and credit risk

Dependent variable: Credit risk Dependent variable: Credit rating

Independent variables OLS OLS Tobit Tobit OLS OLS Tobit Tobit
Control variables Yes Yes Yes Yes Yes Yes Yes Yes
Customer dependence 0.7276 (0.064) 0.7440 (0.065) 0.2788 (0.026) 0.5593 (0.054)
Supplier dependence 0.2395 (0.070) 0.2588 (0.072) 0.0719 (0.028) 0.1415 (0.060)

2238
Industry dummy Yes Yes Yes Yes Yes Yes Yes Yes
Observations 6,538 6,483 6,538 6,483 6,538 6,483 6,538 6,483
R-squared 0.3728a 0.3648a 0.1202b 0.1173b 0.3278a 0.3186a 0.1528b 0.481b
 
Notes: Robust standard errors in parentheses. aAdj R-squared; bPseudo R2; OLS: Ordinary least squares; Tobit: Tobit regression; p < 0.05; p < 0.01
Volume 36 · Number 12 · 2021 · 2231–2242
Journal of Business & Industrial Marketing
 Supply chain relationships and credit risk
Feng Liu and Kwangtae Park
Figure 2 Average marginal effect of customer dependence on the
probability of a predicted low credit risk
Figure 3 Average marginal effect of supplier dependence on the
probability of a predicted low credit risk
dependence (i.e. customer dependence and supplier
dependence), credit risk and credit rating. To test the
hypotheses related to these associations, a large sample of 7,879
firms from a Chinese SME board was used in the analysis and
the importance of dependence on major customers or suppliers
for SMEs was investigated. The results indicate that a firm’s
dependence on major customers is positively related to its
credit risk, but negatively related to its credit rating, while a
firm’s dependence on major suppliers is positively related to its
credit risk, but negatively related to its credit rating. Our
findings confirm the SNT that a large, open network of weak
ties (i.e. low supply chain dependence in this study) provide
more information that flows across structural holes, which
implies an extended network helps SMEs to share reliable
information, gain competitive advantage and reduce firm risk.
Overall, our study offers several valuable insights and makes
important theoretical and managerial contributions.
6.1 Theoretical contributions
First, this study responds to Tangpong et al.’s (2015) call for
more empirical research to more fully understand a firm’s
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Volume 36 · Number 12 · 2021 · 2231–2242
Figure 4 Average marginal effect of customer dependence on the
probability of a predicted low credit rating
Figure 5 Average marginal effect of supplier dependence on the
probability of a predicted low credit rating
dependence on customers and suppliers and contributes to the
literature on supply chain management and risk management
by discussing the concept of dependence on major customers or
suppliers. An SME’s dependence on major customers or
suppliers differs from that of large companies. In particular, this
study proposes that higher customer and supplier dependence
is risky for three reasons: load contract terms, supply chain
uncertainty and internal liquidity. Accordingly, this study adds
to previous conceptual insights on customer and supplier
dependence by providing clear empirical evidence for its effects
on SMEs.
The second contribution of this study is to CRM literature by
extending the understanding of the financial impact of the
dependence on major customers (Dhaliwal et al., 2016; Kim
and Zhu, 2018; Saboo et al., 2017). Very little research has
been conducted on the relationship between customer
dependence and SME risk; therefore, our study provides
empirical evidence for the positive association between a focal
SME’s customer dependence and its credit risk and the
negative influence of customer dependence on credit rating.
This outcome contrasts with that of Schwieterman et al. (2018)
 Supply chain relationships and credit risk
Feng Liu and Kwangtae Park
who reported that customer dependence is positively related to
bond rating. We believe that the main reason for this difference
is that our study focused on SMEs in an emerging market,
while their research focused on large companies in the USA.
There are several possible explanations for this finding. First,
SMEs with a higher dependence on major customers may face
potential bargaining power asymmetry with large firms because
of their limited size and capacity; thus, their credit risk tends to
increase (Udomleartprasert et al., 2003). Second, SMEs may
have highly concentrated resource exchanges with their major
customers because of unfair contract terms, which can be an
unprofitable and risky relationship (Kim, 2017). Third, for
SMEs with a highly concentrated customer base, operating
leverage may be increased by a higher level of demand
uncertainty in the supply chain (Irvine et al., 2015). Finally, our
findings corroborate the observations reported by Campello
and Gao (2017) and Yang (2017) related to loan failure and a
high dependence on major customers. Our study confirms the
serious credit risk for SMEs because of a higher level of
customer dependence in the context of China.
Third, this study contributes to the SRM literature by
revealing the influence of supplier dependence on firm risk. We
believe that our study is the first to use a sizable SME sample to
empirically assess the relationship between supplier
dependence and credit risk and credit rating. Unlike
Schwieterman et al. (2018), who identified a positive but
insignificant relationship between supplier dependence and
credit rating, we found a positive and significant relationship
between the former and credit risk, which indicates that
supplier dependence lowers the bond rating for SMEs. A
possible explanation for this may be that an SME with a higher
level of supplier dependence has greater exposure to credit risk
via single-sourcing (Wagner and Bode, 2006). Another possible
explanation for this is that an SME with a smaller supplier base
does not have ready access to substitute suppliers to withstand
the effects of supply chain disruption, thus increasing the
vulnerability of its supply chain because of the lack of available
resources, which might in turn affect its credit risk (Jüttner
et al., 2003). Any adverse change in the relationship between an
SME and its key supplier or the loss of key production materials
could potentially result in significant production and operation
disruptions, leading to a higher rate of business failure.
Furthermore, our study contributes to the strategic
purchasing literature by providing empirical evidence that
SMEs with more concentrated supplier base report higher their
risk. For example, based on survey data from 240 Chinese
companies, Huo et al. (2019) determined that supply chain
dependence is related to the use of coercive and non-coercive
power, and our study further explains the risk dimension of
supplier dependence in terms of Chinese SMEs. Further, we
confirm the proposition of Formentini et al.(2019), who argued
that upstream market risk can be managed through the supplier
base. Our study suggests that if an SME wants to reduce its
credit risk, it should expand its supplier base by growing its
network of reliable suppliers. More importantly, this study
resonates with the findings of Jia and Zsidisin (2014), who
reported that guanxi (i.e. the relationship ties that exist in
Chinese social groups), as a substitute for formal institutional
support, is likely to be a factor in supply relational risk for
Western firms purchasing from China. While the literature on
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Volume 36 · Number 12 · 2021 · 2231–2242
guanxi has mainly concentrated on positive dimensions (e.g.
trust), the present study provides new insights into the negative
influence of guanxi and confirms that SMEs with a more
concentrated supplier base tend to be more at risk. Overall, this
study demonstrated the potential relationship between strategic
purchasing and firm risk.
Finally, our study expands the understanding of the
complexity of the buyer–supplier relationship by generating
more evidence for the management of firm risk using supply
chain relationships and broadening the concept of industrial
marketing and purchasing. Using a supply chain relationship
perspective, our study confirms the important role of customer
and supplier dependence within business networks and
proposes that an SME’s dependence on major customers or
suppliers negatively affects its bond rating. This study thus
provides new evidence for the association between customer
and supplier dependence and firm risk
6.2 Managerial implications
This research provides significant implications for managerial
practice, the first relating to the structure of downstream
markets. Our results indicate that an SME with greater
dependence on major customers may have a higher credit risk.
Thus, we suggest that operators should be concerned about the
over-dependence on major customers and that, for CRM,
managers should seek a wider and more diverse customer base
and reduce their dependence on major customers. A second
implication is related to the structure of upstream markets. A
positive relationship between supplier dependence and credit
risk was found in the present study. Thus, we suggest that
managers should increase the size of their supplier base and
integrate upstream resources, thereby improving their bond
rating. Third, based on our findings, managers should develop
a greater number of weak ties with more customers and
suppliers. In summary, we report that managing supply chain
relationships can help SMEs to reduce firm risk in the context
of emerging economies, and our findings provide useful
information for SMEs’ industrial marketing and purchasing
processes and risk management.
7. Conclusion
To broaden the understanding of industrial marketing and
purchasing, this study sought to address two important issues
related to an SME’s supply chain network in terms of risk
management. First, we investigated the impact of customer
dependence on firm risk. Our results suggest that SME
dependence on major customers is positively associated with
credit risk but negatively associated with its credit rating.
Second, we evaluated the effect of supplier dependence on firm
risk. The results indicated that SME dependence on major
suppliers is positively associated with its credit risk but
negatively associated with credit rating. Overall, our study
explored how the dependence of an SME on major customers
or suppliers affects credit risk and concluded that this
dependence positively influences its credit risk and negatively
influences its credit rating.
Although this study provides important insights into the
management of risk using supply chain relationships, there are
a number of limitations that should be noted and subsequent
 Supply chain relationships and credit risk
Feng Liu and Kwangtae Park
suggestions for future research. The first limitation is that a
cross-sectional design was used in this study. Panel data
research is thus required to determine causality between
customer and supplier dependence and credit risk over time.
Secondly, we limited our investigation to the buyer–supplier
relationship; thus, the triadic supplier–buyer–supplier
relationship should be considered in future research. Thirdly,
though our study provides empirical findings for SMEs,
additional research is needed using case studies and/or
qualitative methods to provide more detail on the mechanisms
underlying the trends uncovered in the present research.
Fourth, our study explains customer and supplier dependence
by adopting SNT, so the applicability of other theories (e.g.
resource dependence theory) is also worth investigating. Fifth,
how to manage a supplier base has become an important issue
in industrial marketing and purchasing processes; we hope that
researchers will use the resource dependence theory to
investigate more nuanced components of supplier dependence
to provide new insights into strategic purchasing. Finally, the
results may be generalizable beyond Chinese SMEs, although
there are differences in the economic and cultural
environments between China and other countries. This is
because, when working with major partners, SMEs from
various countries face similar issues because of their shared firm
characteristics, such as a limited size, fewer resources,
unbalanced power and a vulnerable supply chain. Future
studies might thus corroborate our findings in other markets,
whether they be advanced or emerging, to fully delineate the
role of supply chain dependence in risk management.
Note
1 The New Third Board Market is a Chinese over-the-
counter SME bond market, established in 2006, which
attracts a large number of start-up companies and SMEs
needing financing with lower listing requirements (Li et al.,
2015).
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Corresponding author
Kwangtae Park can be contacted at: ktpark@korea.ac.kr