By Olcay Yücel ÇULHA Pınar ÖZBAY ÖZLÜ Cihan YALÇIN

1. The Role of Financial Structure and Financial Depth in Economic Growth:A Firm Level Analysis for Turkey By Olcay Yücel ÇULHA Pınar ÖZBAY ÖZLÜ Cihan YALÇIN INTERNATIONAL CONFERENCE ON SUSTAINABLE GROWTH STRATEGIES FOR TURKEY Swissotel, İstanbul FRIDAY, 17 JUNE 2005

2. LITERATURE Extensive literature on the relationship between financial system and growth starting from Schumpeter Cross country panel data analyses confirm that well developed financial system supports economic growth. Small, high tech firms contribute to employment, innovations and growth significantly as long as financial constraints that they face are relieved.

3. FINANCIAL STRUCTURE IN TURKEY: STYLIZED FACTS Finance sources, share in total balance sheets

4. FINANCIAL STRUCTURE IN TURKEY: STYLIZED FACTS The finance choice of firms classified according to different firm groups for 1995-2003 period are given in details in Figures (based on 2 thousand manufacturing firms that report regularly).

8. FINANCIAL STRUCTURE IN TURKEY: STYLIZED FACTS

9. MOTIVATION Turkey has witnessed a long-lived macroeconomic instability which also distract the mechanisms that allocate resources from savers to investors. The unavailability and high cost of financial sources turned out to be obstacles that potentially restrain sustainable economic growth and employment. By this study, we try to uncover the implications of the firms’ finance choice for various firm groups, namely small, large, young, old, high-tech etc. We want to answer the following question: Does the current financial system support small and medium sized, young, high tech firms that are main contributors of employment, innovation and thus economic growth?

10. DATA This study uses the data set of balance sheets, income statement and other information belonging to firms which report information regularly to the Central Bank of Turkey. Around 4 Manufacturing thousand firms

11. MODEL GSALEit = f(LEMPit, EXPSHAit, PROFITAit, LTALABit, EXTFINit, EXTFINit*DUMj, MBLOANt, MBLOANt*DUMj, GDPt, YDUM)

12. DESCRIPTION OF VARIABLES

17. CONCLUSIONS We believe that long-lived macroeconomic instability and high public borrowing requirement distracted the functioning of financial sector and prevent the development of well functioning financial institutions. Non-financial firms, mainly large ones, behaved as intermediaries, which led to inefficiencies in the economy. Inefficiencies in the banking sector and other institutional weaknesses caused the short term trade credits to appear as a widely used financing source for firms that are in need of external finance. This structure is far from supporting long-term investment and thus sustainable growth as specialization is discouraged and non-market relations along with informal financial activities are encouraged. Empirical results show that small, high-tech firms that are main sources of the employment and innovation, are not well-supported by this system. We believe that this financial structure is one of the main obstacles for creating new jobs and thus achieving sustainable economic growth.

18. CONCLUSIONS As evident in many developed countries, diversification in the finance choices in the forms of issuing bonds and equity and especially venture capital is believed to improve the institutional quality of the financial system. This implies less informality, cheaper resources, competition, more resources for weakly capitalized firms and innovative investment. In this context, improvement of the corporate governance is the key issue in the sense that it may provide right signals to savers and financial intermediaries. Reliable reporting and availability of proper ratings are believed to support institutionalization of small and medium sized firms.