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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? Rajan/Zingales: access to external finance What is the effect of finance on firms of different sizes?

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Firm Size, Finance and Growth

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  1. Firm Size, Finance and Growth Thorsten Beck Asli Demirguc-Kunt Luc Laeven Ross Levine

  2. Motivation • What are the channels through which finance affects growth? • Rajan/Zingales: access to external finance • What is the effect of finance on firms of different sizes? • 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?

  3. 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 growth-constraining effect of financing obstacles more for small than for large firms

  4. 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)

  5. Firm size across industries

  6. Methodology • 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

  7. Financial development, small firm share and growth

  8. Financial development, small firm share and growth - economic significance • Small Firm Share: • 25th percentile: Spinning • 75th percentile: Furniture • Private Credit: • 25th percentile: India • 75th percentile: Canada • Furniture grows 1.4% faster than spinning in Canada than in India • Average growth rate = 3.4%

  9. Robustness tests • Additional industry characteristics: • Asset composition (Claessens and Laeven, 2003) • Growth opportunities (Fisman and Love, 2004) • Additional country characteristics: • GDP per capita, Openness, Human capital accumulation • Alternative small firm cut-offs • significant up to 100 employees • Alternative data sources on small firm share: • US Census 1997 • UK Census data 1997 • Alternative dependent variables: • Growth over 1980-1999

  10. Alternative indicators of financial development

  11. 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

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