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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

Firm Size, Finance and Growth

Thorsten Beck

Asli Demirguc-Kunt

Luc Laeven

Ross Levine

motivation
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?
related literature
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
technological firm size
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)

methodology
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
financial development small firm share and growth economic significance
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%
robustness tests
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
conclusions
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