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Firm Size, Finance and Growth

Firm Size, Finance and Growth. Thorsten Beck Asli Demirguc-Kunt Luc Laeven Ross Levine. Motivation. Does finance have distributional effects ? Income distribution / poverty (BDL, 2005) Small (poor) firms do not access financial system, so finance benefits large (rich) firms more

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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 • Does finance have distributional effects? • Income distribution / poverty (BDL, 2005) • Small (poor) firms do not access financial system, so finance benefits large (rich) firms more • (Greenwood / Jovanovic, 1990) • Financial development lowers fixed costs (transaction & information), so helps small (poor) • (Banerjee / Newman, 1993; Galor / Zeira, 1993) • (How) does finance affect growth? • Policy: (a) Political economy and (b) SMEs

  3. This paper’s goals … • Does financial development boost the growth of small firms more than large firms? • Distributional effects • Mechanisms through which finance affects growth • Policy

  4. Methodological Strategy • Do “small-firm” industries grow faster in countries with well-developed financial systems? • Coase (1937) • Firms optimally internalize some activities, but size enhances coordination costs • Industry’s “natural” firm size depends on that industry’s production technologies • Step 1: Compute each industry’s natural firm size: Share of employment in “small firms.” • Step 2: Test whether industries that are naturally composed of small firms, grow faster in countries with well-developed financial systems.

  5. More on the methodology … • We use the U.S. as the benchmark to compute each industry’s natural firm size • Industry Firm Size = F{Industry & Country} • Assume USA has comparatively few distortions • Then, role of country traits is small. • Obtain proxy for industry’s natural firm size • (Similar to RZ, who compute industry’s natural tendency to use external finance.)

  6. Related literature • Guiso, et al: Small firms benefit more from regional financial development in Italy • Nice. • But, we focus across countries • Beck, et al (2005): reported financial obstacles to growth is stronger in small firms in under-developed financial systems • Nice. • But, based on survey responses

  7. Data Industry growth Small firm share Financial development

  8. Industry growth • Average annual growth rate of real value added of industry k in country i over the period 1980-1990. • We show the results hold over different sample periods.

  9. Small firm share • Industry k’s share of employment in firms with less than 20 employees in the U.S. (1992 Census, earliest date possible) • Robustness • Different firm size cut-offs (5: 500) • (1997 Census … correlation of 92%) • Concerns about U.S.: • Control for other factors that may invalidate the US as a benchmark. • U.S. markets do not have to be perfect. They have to give a reasonable ranking. • Different benchmark countries

  10. Table 1: Firm size across U.S. industries(A few, select observations)

  11. Financial development • Private credit • Others • Liquid liabilities • Stock market development • Legal & accounting systems

  12. Methodology Growth = average annual growth of real value added of industry k in country i, averaged over 1980-90 Share = Initial share of industry i in 1980 in total manufacturing FD = Claims of financial institutions on private sector relative to GDP in country i. Small firm share = benchmark share of small firms in industry k OLS and IV, also cluster at industry or country level Sample: 36 industries across 44 countries

  13. Table 3: Financial development, small firm share and growth

  14. Financial development, small firm share and growth - economic significance • Small Firm Share: • 25th percentile: Spinning • 75th percentile: Furniture (lots of small firms) • 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%

  15. But, … • Small firm share in the U.S. may be • correlated with other industry-specific traits that • interact with country-level characteristics to explain industry growth

  16. Robustness: industry traits … • Is small firms share a proxy for … • External dependence? • Intangible assets? • Claessens and Laeven show this with property rights protection • But, we interact it with both property rights and private credit • Good, or bad, growth prospects? • Technology factors that  firm size in U.S.? • Control for median firm size of the large, listed firms by industry in the U.S. (in a few slides)

  17. Robustness: country traits … • Is financial development a proxy for … • Economic development? • Schooling? • Human capital may affect natural firm size • Size of the market? • Openness to trade • Size of the economy

  18. Conclusions • Finance has distributional effects • Small firm industries grow faster (than big firm industries) with better financial development • {BDL: the poor enjoy faster income growth (than the rich) with better financial development.} • Mechanism linking finance and growth: Alleviates constraint on small firm growth • Policy: Political economy & SMEs

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