External Financing Patterns for Small and Medium Firms in Eastern Europe and Central Asia: Does Financial and Institutional Development Matter?
Abstract
This paper examines the financing patterns of small and medium firms in Eastern Europe and Central Asia transition region and the extent to which these patterns are influenced by financial and institutional development. Using recent firm-level data from 28 countries from the region, we analyse four external sources of financing of firms’ working capital and investments in fixed assets (i.e. financing from banks, nonbank financial institutions, suppliers and informal financing). While there are significant differences on the one hand between financing of working capital and financing of investments, and on the other hand across countries in terms of small firms’ financing patterns but also in terms of macroeconomic indicators, three findings stand out.First, our results suggest that small firms have less access to formal financing sources such as banks than medium and large firms. Second, financial development is shown to reduce small firms’ use of informal financing of both their working capital and investments and also to expand financing of their working capital from non-bank financial intermediaries. Third, better protection of property rights – as an indicator of institutional development – increases small firms’ access to finance from nonbank financial intermediaries.
References
[2] Barth, J.R., Lin, D., and Yost, K. 201). Small and Medium Enterprise Financing in Transition Economies, Atlantic Economic Journal, 39: 19-38.
[3] Beck, T., and Demirgüç-Kunt, A. 2013. Is Small Beautiful? Financial Structure, Size and Access to Finance, World Development, 52: 19-33.
[4] Beck, T., and Demirgüç-Kunt, A. 2006. Small and medium-size enterprises: Access to finance as a growth constraint, Journal of Banking & Finance, 30: 2931-2943.
[5] Beck, T., Demirgüç-Kunt, A., and Maksimovic, V. 2005. Financial and Legal Constraints to Growth: Does the Firm Size Matter? The Journal of Finance, 60(1): 137-167.
[6] Beck, T., Demirgüç-Kunt, A., and Maksimovic, V. 2008. Financial Patterns around the World: Are Small Firms Different? Journal of Financial Economics, 89(3): 467-487.
[7] Berger, A. N., and Udell, G. F. 1998. The Economics of Small Business Finance: The Roles of Private Equity and Debt Markets in the Financial Growth Cycle, Journal of Banking and Finance, 22: 613-673.
[8] Clarke, G., Cull, R., and Kisunko, G. 2012. External finance and firm survival in the aftermath of the crisis: Evidence from Eastern Europe and Central Asia, Journal of Comparative Economics, 40: 372-392.
[9] Demirgüç-Kunt, A., and Maksimovic, V. 1998. Law, Finance and Firm Growth, Journal of Finance, 53: 2107-2137.
[10] Demirgüç-Kunt, A., and Maksimovic, V. 1999. Institutions, Financial Markets, and Firm Debt Maturity, Journal of Financial Economics, 54: 295 -336.
[11] Gianneti, M., and Ongena, S. 2009. Financial Integration and Firm Performance: Evidence from Foreign Bank Entry in Emerging Markets, Review of Finance, 13: 181-223.
[12] Kolasa, M., Rubaszek, M., and Taglioni, D. 2010. Firms in the Great Global Recession: The Role of Foreign Ownership and Financial Dependence, Emerging Markets Review, 11: 341-357.
[13] Kuntchev, V., Ramalho, R., Rodriguez-Meza, J., and Yang, J.S. 2013. What have we learned from the Enterprise Survey Regarding Access to Credit by SMEs?, Policy Research Working Paper World Bank, WPS 6670, Available at SSRN: http://ssrn.com/abstract=2344038 .
[14] Le, N., Venkatesh, S., and Nguyen, T.V. 2006. Getting bank financing: A study of Vietnamese private firms, Asia Pacific Journal of Management, 23(2): 209-227.
[15] Levine, R., Loayza, N., and Beck, T. 2000. Financial intermediation and growth: Causality and causes, Journal of Monetary Economics, 46: 31-77.
[16] Levy, B. 1993. Obstacles to Developing Indigenous Small and Medium Enterprises: An Empirical Assessment, The World Bank Economic Review, 7(1): 65-83.
[17] Li, D., and Ferreira, M.P. 2011. Institutional environment and firm’s sources of capital in Central and Eastern Europe, Journal of Business Research, 65(4): 371-376.
[18] Love, I., Preve, A.L., and Sarria-Allende, V. 2007. Trade Credit and Bank Credit: Evidence from Recent Financial Crisis, Journal of Financial Economics, 83: 453-469.
[19] Myers, S. C. 1984. The Capital Structure Puzzle, The Journal of Finance, 39 (3): 574-592.
[20] Popov, A., and Ongena, S. 2012. Interbank Market Integration, Loan Rates, and Firm Leverage, Journal of Banking & Finance, 35: 544-559.
[21] Roncek, W. 1992. Learning More From Tobit Coefficients: Extending a Comparative Analysis of Political Protest, American Sociologic Association, 57(4): 503-507.
[22] Sheng, H.H., Bortoluzzo, A.B., and Pereira dos Santos, G.A. 2013. Impact of Trade Credit on Firm Inventory Investment during Financial Crisis: Evidence from Latin America, Emerging Markets Finance and Trade, 49: 32-52.
[23] Wehinger, G. 2012. Bank Deleveraging, the Move from Bank to Market-Based Financing and SME Financing, OECD Journal: Financial Market Trends, 1: 65-79.
*** EBRD 2015. The Business Environment in the Transition Region, http://ebrdbeeps.com/wpcontent/uploads/ 2015/04/overview.pdf (accessed July 23, 2015).
**** EBRD. 2014 ‘European Bank of Reconstruction and Development Transition Report 2014’, http://www.ebrd. com/news/publications/transition-report/transition-report-2014.html (accessed July 14, 2015).
*** EBRD-World Bank Business Environment and Enterprise Performance Survey (BEEPS) https://www. enterprisesurveys.org/Portal/Login.aspx?ReturnUrl=%2fportal%2felibrary.aspx%3flibID%3d14&libID=14 (accessed April 21, 2015).
*** European Commission. 2014. ‘Survey on the Access to Finance of Enterprises (SAFE): Analytical Report’, European Union 2014.
*** Heritage Foundation, 2012 Index of Economic Freedom, 2012, Available at http://www.heritage.org/ index/pdf/2012/book/index_2012.pdf (accessed April 19, 2015).
*** World Bank. 2014. ‘World Bank Group provided $11.9 Billion to Europe and Central Asia in Fiscal Year 2014’, World Bank Press Release, http://www.worldbank.org/en/news/press-release/2014/07/15/world-bank-group-provided-11-9-billion-to-europe-and-central-asia-in-fiscal-year-2014> (accessed August 8, 2015].
*** World Bank. 2015. ‘Regional Brief Europe and Central Asia’. Available at http://www.worldbank.org/ en/region/eca/overview (accessed July 17, 2015).
Keywords
The Copyright Transfer Form to ASERS Publishing (The Publisher)
This form refers to the manuscript, which an author(s) was accepted for publication and was signed by all the authors.
The undersigned Author(s) of the above-mentioned Paper here transfer any and all copyright-rights in and to The Paper to The Publisher. The Author(s) warrants that The Paper is based on their original work and that the undersigned has the power and authority to make and execute this assignment. It is the author's responsibility to obtain written permission to quote material that has been previously published in any form. The Publisher recognizes the retained rights noted below and grants to the above authors and employers for whom the work performed royalty-free permission to reuse their materials below. Authors may reuse all or portions of the above Paper in other works, excepting the publication of the paper in the same form. Authors may reproduce or authorize others to reproduce the above Paper for the Author's personal use or for internal company use, provided that the source and The Publisher copyright notice are mentioned, that the copies are not used in any way that implies The Publisher endorsement of a product or service of an employer, and that the copies are not offered for sale as such. Authors are permitted to grant third party requests for reprinting, republishing or other types of reuse. The Authors may make limited distribution of all or portions of the above Paper prior to publication if they inform The Publisher of the nature and extent of such limited distribution prior there to. Authors retain all proprietary rights in any process, procedure, or article of manufacture described in The Paper. This agreement becomes null and void if and only if the above paper is not accepted and published by The Publisher, or is with drawn by the author(s) before acceptance by the Publisher.