Trade credit and ethnicity: Case of ethnic minority area in China

•We study interfirm trust formation by ethnic minority firms in Xinjiang, China.•There is general ethnic bias against ethnic minority firms in trade credit receipt.•Ethnic minority firms are less eager to build trust with their business partners.•Ethnic minority firms less trust other ethnic minority firms in trade credit offer.•Interfirm trust is fairly insufficiently formed, even within ethnic minority firms.

Using data for trade credit practices, this work investigates interfirm trust formation by ethnic minority firms in the Xinjiang Uygur Autonomous Region, China. The main findings of this research are as follows. First, there is a general ethnic bias against ethnic minority firms in receiving trade credit. Second, ethnic minority firms are less eager than Han firms to build interfirm trust with their business partners by offering trade credit, which is partly due to their financing constraints. Third, ethnic minority firms have less trust of other ethnic minority firms in offering trade credit. Fourth, these trade credit practices by ethnic minority firms tend to be more pronounced in those surviving after 2005. Fifth, ethnic minority firms do not share their members' information regarding productivity within their circle of ethnic minority firms. Overall, interfirm trust is insufficiently formed, even among ethnic minority firms.