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SME Finance A Research Agenda

SME Finance A Research Agenda. Motivation. World Bank Group has a substantial portfolio of SME-related activities The rationale for these operations remains vague. Reasons cited to justify Bank strategy for promoting SMEs.

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SME Finance A Research Agenda

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  1. SME FinanceA Research Agenda

  2. Motivation • World Bank Group has a substantial portfolio of SME-related activities • The rationale for these operations remains vague.

  3. Reasons cited to justify Bank strategy for promoting SMEs • SMEs have greater benefits compared to larger firms – in terms of job creation, efficiency and growth • SMEs help alleviate poverty • Business environment in developing countries do not give equal opportunities to SMEs, therefore we should “level the playing field.”

  4. DECRG research project • How is firm size determined and do SMEs have an important impact on growth and poverty alleviation? • Do SMEs face higher constraints to their growth and which policies and future trends are likely to affect them? • How do we make the existing lending to SMEs more effective?

  5. Research project • SMEs and growth and poverty alleviation • Historical • Cross-country • Cross-industry • Firm level • SMEs and their constraints • Firm size and Constraints • Bank regulation and Constraints • Impact of foreign entry and technological change • Importance of trade credit • Case studies

  6. Financial and legal constraints to firm growth: does size matter?Beck, Demirgüç-Kunt and Maksimovic (2002) Use detailed firm-level data for 54 countries (World Business Environment Survey) to examine: • How is firm growth affected by different financial, legal and corruption obstacles? • Which specific obstacles have an effect? • Are small and medium size enterprises (SMEs) affected differently by different obstacles? • Are SMEs constrained everywhere in the same way or much more in countries with underdeveloped financial and legal systems and higher levels of corruption?

  7. Contribution of this paper is.. • Recent research in corporate suggests that • underdeveloped legal and financial systems constrain firms • constraints diminish as financial and legal development occurs • These conclusions • based on samples of largest firms • infer the existence of general constraints • do not examine specific constraints

  8. World Business Environment Survey • 4000 firms in 54 countries • Stratified sample • by number of employees: 5-50; 51-500, 501+ • Detailed questions on specific obstacles

  9. A first look Financing Legal Corruption Small 2.95 2.12 2.51 Medium 2.90 2.19 2.41 Large 2.62 2.21 2.33 High-Priv 2.74 2.05 2.30 Low-Priv 2.97 2.25 2.53 High- Laworder 2.71 2.04 2.09 Low-Laworder 2.97 2.26 2.67 High-Corrupt 2.62 1.98 2.11 Low-Corrupt 3.08 2.32 2.71

  10. Empirical model firm growth=f(control variables, obstacles) firm growth=f(control variables, obstacles X size) firm growth=f(control variables, obstacles X institutional variables) firm growth=f(control variables, obstacles X size X institutional variables)

  11. Firm growth: the impact of obstacles Obstacles: -0.031*** (0.009) Financing -0.029*** (0.009) Legal -0.021*** (0.009) Corruption

  12. Firm growth and obstacles:large versus small firms General Financing Obstacle General Legal Obstacle General Corruption Obstacle Large -0.023** (0.012) -0.013 (0.013) -0.007 (0.012) Medium -0.031*** (0.009) -0.026*** (0.010) -0.017* (0.010) Small -0.034*** (0.009) -0.040*** (0.011) -0.030*** (0.010)

  13. Firm growth and obstacles:impact of institutional development General Financing Obstacle General Legal Obstacle General Corruption Obstacle -0.043*** (0.013) Financing Obstacle Financing Obstacle x Priv 0.045* (0.029) -0.085** (0.027) Legal Obstacle 0.014* (0.009) Legal Obstaclex Laworder -0.084*** (0.026) Corruption Obstacle Corruption Obstacle x Corrupt 0.020*** (0.008)

  14. Firm growth and the impact of obstacles: firm size and national differences Gen. corruption obstacle: Gen. financing obstacle: Gen. legal obstacle: - 0.020 - 0.023 - 0.060 Large Large Large (0.037) (0.016) (0.046) - 0.067** - 0.031** - 0.092** Medium Medium Medium (0.028) (0.014) (0.040) - 0.058*** - 0 .117*** - 0.104*** Small Small Small (0.029) (0.014) (0.044) 0.002 - 0.039 0.009 Large x Corrupt Large x Priv Large x Laworder (0.051) (0.013) (0.013) 0.018** 0.021 0.018* Medium x Corrupt Medium x Priv Medium x Laworder (0.009) (0.038) (0.010) 0.097*** 0.026*** 0.015* Small x Priv Small x Corrupt Small x Laworder (0.009) (0.039) (0.010)

  15. Our principal findings • All classes of obstacles – financial, legal and corruption – affect firm growth adversely • Size is of critical importance – smallest firms are the most adversely constrained • Firms that operate in institutionally underdeveloped countries are affected by all obstacles to a greater extent • Marginal institutional development relaxes the constraints for SMEs

  16. Policy implications • Development institutions devote large amount of resources to SMEs • Paper provides evidence that indeed SMEs face greater obstacles compared to large firms and small firms are more constrained by them • Paper also shows that it is the smaller firms that stand to benefit the most from improvements in financial and legal development and reduction in corruption • Thus efforts in this area are justified in promoting the development of the SME sector

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