What Explains Cross‐country Industry Growth Patterns? Trade,Development and the Equity Financing Channel

We test theories that examine how economic and financial development affect cross‐country industry growth patterns. Finance theory suggests that financial development affects growth by lowering the cost of external finance. This has the implication that industries in more finance‐hungry sectors will grow faster in countries where financial markets are more developed. In addition, if financing constraints are lessened when stock market performance is high, firms in sectors more dependent on external finance should grow more rapidly following periods of good stock market performance. Trade and development theories, on the other hand, imply that a country's product‐mix and the pattern of industrial growth reflect which stage of development it is in and its factor endowments. Thus, one implication of trade/development theories is that countries that are close to each other in terms of GDP per capita should have similar patterns of industrial growth. Our tests find support for each of these theories.     

R&;D investment and financing constraints of small and medium-sized firms

This study tests for financial constraints on R&D investment and how they differ from capital investment. To identify constraints in the access to external capital, we employ a credit rating index. Our models show that internal constraints, measured by mark-ups, are more decisive for R&D than for capital investment. For external constraints, we find a monotonic relationship between the level of constriction and firm size for both types of investment. Thus, external constraints turn out to be more binding with decreasing firm size. On the contrary, we do not find such monotonic relationships for internal constraints. Differentiation by firms’ age does not support lower constraints for older firms.     

How do firms finance their exports? – evidence from China

Using a firm-level production data over the period of 2005–2009 from China, this paper provides a new empirical evidence on how firms finance their exports when they have several financial options. The main results of the paper can be summarized as follows. First, firms who have better access to any finance are more likely to export and export more. More financial options lead to a higher export probability and capacity due to the complementary relation between financial options. Second, of all financial options, the internal finance captured by cash holdings or profit plays the most important role on firms’ export likelihood and volume. Firms rely more on the external finance through borrowing to start exporting, but depend more on issuing stocks to their shareholders to expand their exports. Third, subsample results suggest that the financial option of issuing stocks is generally more important for firms who have worse access to external finance in determining export propensity and quantity, such as private-owned firms, small-scale firms, young firms, and non-eastern firms.     

Assessing the Determinants of High-Growth Manufacturing Firms in Italy

Few firms grow rapidly, but their contribution to employment growth is often impressive. The main purpose of this paper is to analyse both the external and internal factors that can affect the probability of being a high-growth firm (HGF) in Italy. We found that HGFs are, on average, young firms and are present in different industries, but the role of demand is important to understanding their performance at the sectoral level. Moreover, our findings show that financial constraints and profitability are not associated with the probability of being a HGF. HGFs, on average, are characterised by high productivity, but only when growth is measured in terms of sales. The most original results of this study concern the endogenous determinants of rapid growth, which have yet to be adequately examined in the literature. First, we found that the concentration of ownership is important for HGFs that experienced rapid growth in their sales. Second, the quality of human capital is a strong point for firms experiencing rapid employment growth.     

Small businesses and liquidity constraints in financing business investment: Evidence from shanghai's manufacturing sector

When firms experience financial hierarchy, external finance, if at all available, is substantially more expensive than internal finance. Factors such as transaction costs, agency problem, and asymmetric information have created such a hierarchy. Stiglitz and Weiss (1981) argue that asymmetric information between firms and potential suppliers of external finance creates adverse selection and moral hazard problems in the credit market in developed market economies. This problem of a higher cost of external finance is commonly thought to be more serious for small firms because they are more disadvantaged than their larger counterparts in accessing external finance due to several factors: (1) Public information on small firms is generally not available and leads to the even greater problem of asymmetric information, i.e., more severe adverse selection and moral hazard problems. These information problems have excluded small firms from bond and share markets. (2) Due to the lack of available means of external finance, small firms rely more heavily on bank loans than their larger counterparts. In addition, as small firms are more interested in cultivating stable relationships with a few banks in order to secure a stable supply of credit, these banks become virtual monopolies by lending to small businesses and exercise their market power in lending to small firms.Most of existing research considers only small firms in market economies; little research has been done to understand the relationship between firm size and investment financing in any economy in transition. This paper makes a contribution to the literature by studying the relationship between firm size and liquidity constraints by using a firm level data of manufacturing enterprises in Shanghai during the period of 1989–1992. We consider whether small manufacturing firms in Shanghai are constrained by the availability of liquidity compared with their larger counterparts when they are financing their fixed investment. In a transforming economy such as China (or other similar transition economies), external finance relies heavily on loans from banks that are fully owned by the state. Due to historical reasons, allocations of credit are always biased in favor of state-owned enterprises. Such a `lending bias' imposes an extra cost on small Chinese enterprises in financing investment as the majority of them are not state-owned.In such an environment, our empirical results show that small manufacturing firms in Shanghai are actually less liquidity-constrained than their larger counterparts in financing their fixed investment. This surprising result is rather different from what people normally predict based on the experience in market economies. We suggest three possible explanations for this peculiar finding: (1) The composition of various firm size classes plays an important role in explaining the result: Non-state enterprises which are fast growing and efficient dominate the small firm classes. Their successes in the markets helps them to generate enough internal funds to smooth their investment over time. (2) The presence of heavy indebtedness of large state-owned enterprises may deprive them of sufficient cash available for investment decision. Given that state-owned enterprises have been making heavy losses, the central and regional governments have a liquidity problem in satisfying their huge liquidity demands. (3) Small enterprises in non-state sectors can rely on the informal credit market to obtain funds for investment although they are excluded from the state banking system.However, the further trade liberalization in terms of eliminating tariffs and quotas caused by China's bid of joining the WTO will erode the profits of these small enterprises as imported goods will be supplied at lower prices. In addition, further reforms in financial sectors may also affect the supply of external finance to small enterprises in nonstate sectors. The consequence may lead to a tight liquidity constraint for small enterprises in China.     

Do Firms Get the Financing They Want? Measuring Credit Rationing Experienced by Small Businesses in the U.S.

This paper measures the extent to which small businesses in the United States in the late 1980s were able to access the external credit finance they desired. We argue that a comprehensive definition of credit rationing must account for both (a) creditworthy firms that apply for and are denied financing, and (b) creditworthy firms that decide not to apply for desired external financing, given expectations about how long it may take to obtain financing and the evolution of investment opportunities.Data from a national survey of small businesses shows that only 2.14 percent of firms did not obtain the funding for which they applied in 1987–88. Another 2.17 percent may have faced some short-run constraints on investment: they were initially denied by lenders but received the credit for which they applied by the end of the sample period. Finally, an additional 4.22 percent of firms are estimated to have been discouraged from applying because of expected denial.Constrained firms are smaller, younger, and more likely to be owned by their founders than those firms that successfully applied for external finance. The total number of credit constrained firms seems quite small, particularly because we cannot distinguish empirically between creditworthy and noncreditworthy firms. Thus the extent of true credit rationing appears quite limited.     

Financial constraints and firm dynamics

This study analyzes the effect of financial constraints (FCs) on firm dynamics. We measure FCs with an official credit rating, which captures availability and cost of external resources. We find that FCs undermine average firm growth, induce anti-correlation in growth patterns and reduce the dependence of growth volatility on size. FCs are also associated with higher volatility and asymmetries in growth shock distributions, preventing young fast-growing firms especially from seizing attractive growth opportunities and further deteriorating the growth prospects of already slow-growing firms, particularly if old. The sub-diffusive nature of the growth process of constrained firms is compatible with the distinctive properties of their size distribution.     

The Determinants of Growth for Small and Medium Sized Firms. The Role of the Availability of External Finance

We present an empirical analysis of the determinants of growth for a sample of Italian small and medium sized firms. We show that, when investigating a sample which includes firms between 10 and 50 employees and a set of variables larger than those usually considered in the literature, growth – net of industry characteristics and ex ante market power – turns out to be significantly affected not only by size and age, but also by state subsidies, export capacity and credit rationing. By adopting a multivariate approach we also show that these findings are confirmed after controlling for heteroskedasticity, survivorship bias and serial correlation. Our results suggest that the hypothesis of independence of firm growth from the initial size and other factors (usually referred to as Gibrat's law in the literature) is not rejected for large firms, while it does not hold for small and medium sized firms under financial constraints in a "bank-oriented" financial system in which access to external finance is difficult.     

Access to Financing as a Barrier to Trade: Evidence From Mauritius

Access to credit is essential for the development and growth of firms. For a small open economy like Mauritius, the ability of firms to enter export markets is essential for their growth and development, given that the size of the local market is quite limited. To increase sales and profitability, firms have to export. However, there are several costs that are involved when firms enter an export market. In many cases, finance becomes an essential factor that influences firms’ ability to export. These authors investigate whether the main constraint that firms in Mauritius face is access to finance and try to understand how firms overcome financial barriers. Given the limitations of existing methods to estimate financing constraints directly from firm-level accounting data, the results based on survey data are an important contribution in improving understanding of firms’ financing obstacles to exporting and how they overcome these barriers.     

The Relaxation of Financing Constraints by the Initial Public Offering of Small Manufacturing Firms

Capital market imperfections, such as information asymmetry, increase the cost of external funds compared to that of internal funds. This phenomenon creates financing constraints limiting the availability of external funds and making corporate investment excessively sensitive to cash flow. This study analyzes the effect of financing constraints on the investment by comparing the financial behavior of Korean firms before and after their stocks are newly listed on a stock exchange. The results show that the sensitivity of investment to cash flow will be higher during the period before initial public offering (IPO) than after IPO. In particular, the effect of financing constraints relaxation by IPO is more prominent in small than in large manufacturing firms.     

Where Do Financial Constraints Originate from? An Empirical Analysis of Adverse Selection and Moral Hazard in Capital Markets

Despite the voluminous and growing literature on financial constraints, the origins of the constraints are hardly ever empirically analyzed. This paper offers such an analysis. We study, in particular, the empirical prevalence of adverse selection and moral hazard in capital markets using a unique survey data on Finnish small and medium-sized enterprises (SMEs). The survey data suggest that adverse selection is empirically more prevalent than moral hazard in the capital markets that the SMEs face. We also find that of the variables indicating the presence of adverse selection and moral hazard, the former has more explanatory power in regressions modeling the availability of external finance to the SMEs than the latter. Finally, we document that our proxies for adverse selection and moral hazard are inversely related to the age of firms, just like Peter Diamond’s (1989) model predicts.     

Increasing market power in Slovenia: Role of diverging trends between exporters and non-exporters

This paper documents the evolution of markups in a small open economy, Slovenia, using a comprehensive data set covering the full population of firms. It makes three novel contributions to the literature. First, in contrast to other work for Europe, we find that markups have increased from 1.05 to 1.19 between 1994 and 2015. Second, while other research so far found exporters typically to have higher markups, we find the opposite in Slovenia. Though the rise in markups occurs both with exporters and non-exporters, there is a consistent diverging trend in markups in favour of non-exporters since 1999. This can be attributed to increased competitive pressure faced by exporters following the comprehensive trade liberalisation after 1999 and their increased participation in global value chains. Third, we decompose aggregate markups and show that the increase in markups, for both exporters and non-exporters, is mainly driven by the within component rather than the reallocation effect. This suggests that all firms were increasing their markups, rather than high-markup firms increasing their market share over time.     

Financing the German Mittelstand

This paper describes how the German Mittelstand, or small- and medium-sized enterprises, are financed in Germany. The role of the German Mittelstand, both in a static and in a dynamic framework, is described and contrasted with that of the same size group in other leading industrialised countries. We find that in general, the Mittelstand has played a mmore important role in Germany than in other industrialised nations, such as the United States or the United Kingdom. The traditional success of the German Mittelstand is partly attributable to a system of finance that is richly layered by complementary institutions designed to meet the financial needs of both large and smaller enterprises. However, we find evidence that even under the German system of finance liquidity constraints exist and are greater for smaller firms. The German system of finance moreover seems particularly deficient in the channeling of funds to new firm startups in the newer industries.     

Firm Size,Source of Finance,and Growth - Evidence from China

Using a comprehensive firm-level data set from China spanning the period 1998–2005, this study investigates the relationship between firm size, financing sources, and total factor productivity growth. Controlling for the endogeneity of financing sources, we find that firm size plays an important role in the way financial structure affects the growth process. Domestic bank loans are more effective for bigger firms, while self-raised finance is more beneficial to smaller firms’ growth. We also uncover evidence that ownership mediates the relationship between firm size, finance, and growth.     

Liquidity Constraint on the Production of Firms in Southern Italy

The paper shows how small and medium enterprises located in the less developed regions of Southern Italy face higher liquidity constraints compared to the firms in the Central-Northern Italian regions. The reasons for these constraints are the undersized nature of firms and higher risk of business activity. Consequently, credit rationing is more extensive. In order to analyse the effects on the potential growth of firms’ production, a simple model is presented, followed by estimates for growth. The results confirm the existence of a bottleneck of financial resources devoted to current finance production that limits the accumulation of working capital even when faced with favourable market opportunities.     

The age-effect of financial indicators as buffers against the liability of newness

This paper builds on the liabilities of newness literature to suggest that accounting information is important for new firms. Using a sample of over 30,000 companies followed during their first 7 years of existence, we find evidence that financial indicators mitigate the liability of newness and that this buffering effect is stronger the younger the organization. These results represent three primary contributions to the literature. First, our conceptualization of accounting measures as indicators of external (creditworthiness enhancing legitimacy) as well as internal (targets for management) buffers to the liabilities of newness provides a novel way of viewing these constructs and explains why they are important to new firms despite their uncertainty and opacity. Second, we theoretically justify and empirically validate that these constructs are more important the younger the new firm is, which runs counter to the common wisdom of these constructs in the entrepreneurship literature. Third, we identify buffers against failure for new firms that are generalizable across industries.     

Growing firms and the credit constraint

Restricted access to finance (either debt or equity or both) is potentially a significant constraint on the growth of small businesses. Financing problems arise primarily as a consequence of information asymmetries; the adverse effects of these may in part be counteracted by the use of collateral as a signalling and bonding mechanism and/or by the development of a good working relationship between lender and borrower. If the form of information asymmetry differs for growth firms or if the effects of information asymmetries are less easily ameliorated then growing firms may be more adversely affected by credit constraints. If growth is contingent upon access to credit then the generalised implications for the economy may be significant and detrimental. Using evidence from a survery of over 6,000 firms conducted in 1992, this paper addresses the extent to which growth firms are adversely affected by a credit constraint; the results suggest that the credit constraint for growing firms per se is no greater but growth firms may still experience a credit constraint as a consequence of their relative youth. However, there is evidence to suggest that firms expecting to grow in the future do perceive a rather tighter credit constraint but this may be partly or wholly offset by a generally better relationship with their bank.     

Unpacking Open Innovation: Absorptive Capacity,Exploratory and Exploitative Openness,and the Growth of Entrepreneurial Biopharmaceutical Firms

In this article, we explore the relationship between two key aspects of open innovation in small firms—absorptive capacity (ACAP) and external relationships—and their effects on growth in the U.S. and European biopharmaceutical sectors. Results from an international sample of 349 biopharmaceutical firms surveyed in the United States, United Kingdom, France, and Germany suggest that realized ACAP plays an important role in determining firms’ growth. In terms of the interaction between firms’ ACAP and external relationships, we find that engagement with exploratory relationships depends strongly on the continuity of R&D, while participation in exploitative relationships is more conditional on firms’ realized ACAP.     

Does switching from NASDAQ to the NYSE affect investment–cash flow sensitivity?

We examine whether a firm's sensitivity of investments to cash flow changes when it switches from the NASDAQ to the NYSE over the period 1992–2002. Contrary views exist on the effect of listing switches on investment sensitivity to cash flow. Investment–cash flow sensitivity is a proxy for the degree of uncertainty of using internal funds to finance a firm's investments. We use a least square dummy variable model to analyze panel data before and after switching to determine the impact of switching. Based on pooled data, our evidence is consistent with the view that NASDAQ-to-NYSE switchers have significantly lower investment–cash flow sensitivity, which means that firms rely less heavily on internal financing after switching and find accessing external financing easier. Thus, firms may benefit from switching in terms of a lower cost of external capital due to such factors as increasing visibility, liquidity, and reputation.