Download Firm Size, Finance and Growth

Firm Size, Finance and Growth
Thorsten Beck
Asli Demirguc-Kunt
Luc Laeven
Ross Levine
Motivation

What are the channels through which finance affects
growth?


What is the effect of finance on firms of different sizes?



Rajan/Zingales: access to external finance
Large firms depend more on financial markets and banks
and benefit therefore more
Financial development lowers fixed costs of financial
intermediation, thus helps small firms relatively more
Does financial development ease the growth constraints
of small firms?
Related literature



Rajan and Zingales (1998): industries more
dependent on external finance grow faster in
countries with better developed financial systems
Gusio, Sapienza and Zingales (2004): Small firms
benefit more from regional financial development
than large firms across regions in Italy
Beck, Demirguc-Kunt and Maksimovic (2005):
financial development helps alleviate growthconstraining effect of financing obstacles more for
small than for large firms
Technological firm size


Industries have technological firm size distribution, thus a
technologically determined share of small firms
Since observed size distribution is distorted by policy and
institutional factors, we need data from a country with
relatively low frictions



U.S. census data from 1992
Small firm share = Share of an industry’s work force in
firms with less than 20 employees
No significant correlation with external dependence
(-0.04)
Firm size across industries
ISIC
3411
314
353
311
342
390
331
Average
Industry name
Manufacture of pulp, paper and paperboard
Tobacco manufactures
Petroleum refineries
Food manufacturing
Printing, publishing and allied industries
Other Manufacturing Industries
Manufacture of wood and wood and cork products, except
furniture
S20
0.14
0.30
0.36
3.82
16.32
16.95
21.37
5.85
Methodology
Growth    Country   
i,k
j
j
j
l
Industry l   Sharei , k 
l
 ( Small Firm Share k * FDi )   i ,k





Growth = average annual growth of real value added
of industry k in country i, averaged over 1980-90
FD = Claims of financial institutions on private sector
relative to GDP
Share = Initial share of industry i in 1980 in total
manufacturing
Sample: 36 industries across 44 countries
OLS and IV
Financial development, small firm
share and growth
Share in value added
Private Credit * Small firm share
OLS
-1.012***
(0.253)
0.409**
(0.172)
OLS
-1.095***
(0.253)
0.445**
(0.173)
0.144***
(0.039)
IV
-1.086***
(0.253)
0.567**
(0.220)
0.101***
(0.037)
1242
0.26
1242
0.28
1242
0.27
Private Credit * External dependence
Observations
R-squared
Financial development, small firm share
and growth - economic significance

Small Firm Share:



Private Credit:




25th percentile: Spinning
75th percentile: Furniture
25th percentile: India
75th percentile: Canada
Furniture grows 1.4% faster than spinning in
Canada than in India
Average growth rate = 3.4%
Robustness tests

Additional industry characteristics:



Additional country characteristics:


significant up to 100 employees
Alternative data sources on small firm share:



GDP per capita, Openness, Human capital accumulation
Alternative small firm cut-offs


Asset composition (Claessens and Laeven, 2003)
Growth opportunities (Fisman and Love, 2004)
US Census 1997
UK Census data 1997
Alternative dependent variables:

Growth over 1980-1999
Alternative indicators of financial
development
Share in value added
Private credit 1980-89 * Small firms share
Private credit 1980-89 * External financial dependence
Liquid liabilities * Small firms share
Liquid liabilities * External financial dependence
Market turnover * Small firms share
Market turnover * External financial dependence
Legal efficiency * Small firms share
Legal efficiency * External financial dependence
Law and order * Small firms share
Law and order * External financial dependence
Accounting standards * Small firms share
Accounting standards * External financial dependence
-1.127***
(0.255)
0.444***
(0.161)
0.097***
-1.043***
(0.251)
-1.020***
(0.257)
-0.794***
(0.195)
-0.827***
(0.210)
-0.669***
(0.209)
0.399**
(0.184)
0.085***
(0.032)
0.018
(0.234)
0.074**
(0.036)
0.053***
(0.020)
0.009***
(0.003)
0.053***
(0.020)
0.007***
(0.002)
0.363
(0.244)
0.158***
(0.034)
Conclusions




Industries that rely more on small firms grow
faster in countries with better developed
financial intermediaries
Additional channel through which finance
affects growth: alleviating small firms’
growth constraints
Financial development has cross-industry
distributional ramifications
Financial development is an SME-friendly
policy