Transcript Entrepreneurial Finance around the World: The Impact of

Entrepreneurial Finance around the World: The Impact
of the Business Environment on Financing Constraints
The Financing of Small - and Medium - Sized Firms
OECD, Marche Region & University of Urbino "Carlo Bo"
April 21-22, 2009
Larry Chavis, Kenan-Flagler Business School, UNC Chapel Hill
Leora Klapper, The World Bank
Inessa Love, The World Bank
Financing, Entrepreneurship and
Growth
• Entrepreneurship is vital for economic development
(Schumpeter 1911, Hause and Du Rietz, 1984; Black and Strahan, 2002, Klapper,
Laeven, and Rajan 2006)
• Access to external financing matters for private sector
development and economic growth (Evans and Jovanovic 1989,
Levine 2005)
• Our main questions:
– What is the relationship between firm age and access
to external financing?
– Does the business environment impact this
relationship between firm age and access to external
financing?
What is the expected relationship between
firm age and access to external financing?
• Mature firms have more internal funds, have more
established relationships with lenders, and prefer bank to
equity financing (Bulan and Yan, 2007) …
• …. While asymmetric information limits access to credit
for new firms (Carpenter and Rondi, 2000)
• Higher financing constraints might reduce the likelihood
of starting a business in emerging markets;
e.g. Thailand (Paulson and Townsend, 2004)
What role does the business
environment play in access to financing?
• In India, growth is often funded by informal sources
(Allen et al. 2006)
• And in China, bank financing – and not informal sources
– is associated with higher growth (Ayyagari et al. 2007)
• Protection of property rights benefits small firms more
than large firms in providing access to financing (Beck,
Demirguc-Kunt, and Maksimovic 2007)
• The mix of external financing, which influences firm
growth, is affected by institutional development (Brown,
Chavis and Klapper, 2008)
Preview of Results:
• Younger firms have:
• Less reliance on bank financing and more reliance on
informal financing
• Better access to bank finance in countries with better rule of
law
• The impact of the business environment:
• Credit information and rule of law have a differentially positive
effect on the use of bank finance by young firms
• Credit information has a differentially negative effect on the
use of informal finance by young firms
• Overall, our results suggest that improvements to the legal
environment and credit information infrastructure are
disproportionately beneficial for promoting access to formal
finance by young firms.
Data
• World Bank Enterprise Surveys
• 169 surveys across 103 countries
– Survey years 1999-2006
• 77,000 observations
– 68,000 have financing data: 64,000 working
capital and 47,000 new investment
– 43,500 have external financing
– 60% manufacturing, 30% Services
• Supplemented with data on country level
institutional environment
6
Figure 1: Distribution of Observations Across
Geographic Areas
MENA
8%
IND
SA
4%
7%
AFR
15%
EA
14%
LAC
17%
ECA
35%
Institutional Variables
Low Income
GDP per Capita
Rule of Law
Credit Information Index
$398
-0.60
1.35
Lowermiddle
Income
$1,636
-0.49
2.79
Uppermiddle
Income
$5,086
0.23
4.58
High
Income
Total
Std. Dev.
$16,939
1.07
4.94
$3,036
-0.27
2.91
$4,504
0.64
2.11
• Overall Rule of Law designed to be mean of 0 and
standard deviation of 1
• Credit Information is on a scale of 1 to 6
Figure 2: Distribution of total firms, by
country level income & year
25,000
Number of firm observations
Number of firm observations
40,000
30,000
20,000
10,000
20,000
15,000
10,000
5,000
0
High (8)
Upper-Middle Lower-Middle
(20)
(37)
Low (38)
Income level (number of countries)
0
1999
2000
2001
2002
2003
Survey Year
2004
2005
2006
Percentage of observations
Figure 4: Distribution of total firm
observations, by age
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
1
2
3
4
5
6
7
Age
8
9
10
11
12
Figure 5: Access to Letter of Credit by Age
Percentage of firms
0.6
0.5
0.4
0.3
0.2
0.1
0
1
2
3
4
5
6
7
Age
8
9
10
11
12
Age
13+
Table 1a: Distribution of Working Capital
Financing, by Age
1-2
3-4
5-6
7-8
9-10
11-12
13+
Total
Panel A: Working Capital
61.4%
68.0%
63.9%
66.9%
65.2%
66.2%
59.6%
63.0%
Local Banks
8.1%
7.9%
9.4%
10.2%
10.5%
10.9%
15.1%
12.0%
Foreign Banks
0.7%
0.6%
0.7%
0.9%
0.6%
0.6%
0.8%
0.7%
Leasing
0.3%
0.5%
0.5%
0.6%
0.8%
0.8%
0.7%
0.7%
Trade Credit
12.3%
7.0%
9.7%
7.6%
8.9%
9.0%
11.1%
9.7%
Credit Cards
0.4%
0.3%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
Family & Friends
6.9%
5.1%
4.8%
3.9%
3.9%
3.2%
2.6%
3.6%
Informal Sources
1.4%
1.6%
1.1%
0.8%
0.9%
0.7%
0.6%
0.9%
Grants
0.6%
0.6%
0.6%
0.6%
0.8%
0.9%
1.0%
0.8%
New Equity
6.0%
5.3%
5.3%
4.7%
4.7%
4.4%
3.5%
4.3%
Other
2.0%
3.2%
3.6%
3.5%
3.3%
2.8%
4.4%
3.7%
Retained Earnings
Table 1b: Distribution of New Investment
Financing, by Age
1-2
3-4
5-6
7-8
9-10
11-12
13+
Total
Panel B: New Investment
65.8%
65.6%
65.0%
66.2%
61.7%
64.0%
59.2%
62.4%
Local Banks
8.4%
8.8%
11.2%
12.4%
13.8%
17.0%
19.2%
15.0%
Foreign Banks
1.0%
0.9%
1.0%
1.2%
2.8%
0.9%
1.1%
1.2%
Leasing
1.3%
2.2%
2.6%
2.4%
2.9%
3.0%
3.2%
2.8%
Trade Credit
2.9%
2.9%
4.6%
2.8%
3.6%
2.9%
3.4%
3.4%
Credit Cards
0.1%
0.2%
0.3%
0.1%
0.2%
0.3%
0.2%
0.2%
Family & Friends
7.1%
5.8%
4.2%
3.7%
3.7%
2.9%
2.4%
3.6%
Informal Sources
Grants
3.1%
1.5%
3.1%
1.1%
1.1%
1.2%
0.8%
1.3%
0.8%
1.1%
0.6%
1.1%
0.5%
1.9%
1.1%
1.5%
New Equity
6.3%
6.4%
5.3%
5.1%
5.4%
4.5%
3.8%
4.8%
Other
2.4%
3.2%
3.6%
4.0%
3.9%
2.9%
5.2%
4.2%
Retained Earnings
Financing Categories
• Bank Finance
– Local banks, foreign banks
• Operations Finance
– Leasing, trade credit, credit cards
• Informal Finance
– Informal sources (e.g. money lenders), friends and
family
• Equity Finance
– New equity, grants, ‘other’
Table 2: Financing Patterns (working capital or new
investment)
100.00%
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
1-2
Retained Earnings
3-4
Bank Finance
5-6
7-8
Operations Finance
Percentage of firms using type of financing.
9-10
11-12
Informal Finance
13+
Equity Finance
Table 3: Aggregated Bank Financing Patterns
50.00%
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
1-2
3-4
High
5-6
Upper-Middle
7-8
9-10
Lower-Middle
11-12
Low
13+
Table 3: Aggregated Informal Financing Patterns
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
1-2
3-4
High
5-6
Upper-Middle
7-8
9-10
Lower-Middle
11-12
Low
13+
European Countries by Income
• High (3,890)
–
–
–
–
–
–
Germany
Greece
Ireland
Portugal
Slovenia
Spain
**Also surveyed as lowermiddle income country.
• Upper-Middle (8,867)
–
–
–
–
–
–
–
–
–
–
Croatia
Czech Republic
Estonia
Hungary
Latvia
Lithuania*
Poland
Russia*
Slovak Republic
Turkey*
European Countries by Income
• Lower-Middle (13,437)
–
–
–
–
–
–
–
–
–
–
–
–
–
Albania
Armenia**
Azerbaijan**
Belarus
Bosnia and Herzegovina
Bulgaria
Georgia
Kazakhstan
Macedonia
Montenegro
Romania
Serbia and Montenegro
Ukraine**
• Low (3,666)
–
–
–
–
Kyrgyz Republic
Moldova
Tajikistan
Uzbekistan
**Also surveyed as low
income country.
Aggregate Bank Financing Patterns (Europe)
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1-2
3-4
5-6
High
7-8
Upper-Middle
9-10
Lower-Middle
11-12
Low
13+
Aggregate Informal Financing Patterns (Europe)
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1-2
3-4
5-6
High
7-8
Upper-Middle
9-10
Lower-Middle
11-12
Low
13+
Table 5: Summary Statistics by Firm Age
Firm Age
Firm
Firm
age 5 age > 5
3.6
19.4
Micro
44%
23%
***
Small
35%
40%
***
Medium/Large
21%
37%
***
Sole Proprietorship
38%
24%
***
Partnership
16%
15%
*
Owner Manager
32%
32%
Exporter
16%
25%
***
Audit
39%
55%
***
Foreign Owned
4%
6%
***
State Owned
1%
4%
***
Low Income
36%
22%
***
Lower Middle
44%
46%
***
Upper Middle
High Income
15%
5%
24%
8%
***
***
Table 6: Is there a relationship between sources of
finance and firm age?
Ln Firm Age
Micro
Small
Sole Proprietorship
Partnership
Other Legal Type
Exporter
Audit
Foreign Owned
State Owned
Observations
Pseudo R2
Line of Credit
Bank Finance
0.039
[0.001]***
-0.257
[0.000]***
-0.172
[0.000]***
-0.047
[0.252]
-0.077
[0.003]***
-0.034
[0.212]
0.044
[0.001]***
0.088
[0.000]***
-0.008
[0.823]
-0.027
[0.655]
37,434
0.28
0.039
[0.011]**
-0.221
[0.000]***
-0.147
[0.000]***
-0.076
[0.000]***
-0.024
[0.412]
-0.010
[0.686]
0.031
[0.059]*
0.046
[0.040]**
0.039
[0.553]
-0.179
[0.000]***
37,083
0.19
Operations
Finance
0.012
[0.205]
-0.093
[0.000]***
-0.009
[0.702]
-0.037
[0.107]
0.021
[0.616]
-0.020
[0.352]
0.017
[0.574]
0.001
[0.979]
0.054
[0.573]
-0.044
[0.185]
37,083
0.17
Informal Finance
-0.053
[0.000]***
0.149
[0.000]***
0.054
[0.012]**
0.072
[0.000]***
0.021
[0.119]
-0.030
[0.278]
-0.018
[0.178]
-0.023
[0.091]*
-0.140
[0.000]***
-0.100
[0.000]***
37,061
0.14
Economic Impact of Firm Age
• 10 year old business is
• 9 percentage pts more likely to have
bank financing (mean 19%) or a line
of credit (mean 28%) than a 1 year old
firm
• 12 percentage pts less likely to have
informal financing (mean 14%) than a
1 year old firm
Figure 6a: Probability of Bank Financing Increases with
Firm Age
Coefficient Value
0.05
0
-0.05
-0.1
-0.15
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Firm Age
• Probit regression of bank financing on age
dummies and other control variables
Figure 6b: Probability of Informal Financing Decreases
with Firm Age
Coefficient Value
0.45
0.35
0.25
0.15
0.05
-0.05
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Firm Age
• Probit regression of informal financing on
age dummies and other control variables
Table 7A: How does Rule of Law affect the relationship
between age and patterns of financing?
Ln Firm Age
Rule of Law
Bank Finance
0.037
0.029
0.033
[0.003]*** [0.014]** [0.025]**
Informal Finance
-0.051
-0.050
-0.050
[0.000]***
[0.000]***
[0.000]***
0.087
0.157
-0.063
-0.069
[0.077]*
[0.005]***
[0.007]***
[0.031]**
Rule of Law * Ln
Age Interaction
-0.029
-0.030
0.003
0.009
[0.055]*
[0.076]*
[0.786]
[0.404]
Country Fixed
Effects
No
No
Yes
No
No
Yes
Observations
Psuedo-R2
37,030
0.12
37,030
0.12
37,048
0.19
37,030
0.11
37,030
0.11
37,026
0.14
Table 7B: How does Credit Information effect the
relationship between age and patterns of financing?
Bank Finance
Ln Firm Age
Credit Information
Informal Finance
0.0365
0.0881
0.1018
-0.0508
-0.0972
-0.0981
[0.005]***
[0.005]***
[0.018]**
[0.000]***
[0.003]***
[0.003]***
0.0055
0.0429
-0.0007
-0.0331
[0.599]
[0.054]*
[0.934]
[0.062]*
Credit Information *
Ln Age Interaction
-0.0157
[0.026]**
-0.0186
[0.046]**
0.0146
[0.042]**
0.0143
[0.047]**
Country Fixed
Effects
No
No
Yes
No
No
Yes
Observations
37,065
37,065
37,065
37,065
37,065
37,043
0.12
0.12
0.19
0.11
0.11
0.14
Psuedo-R2
Robustness
• Percentage of type of financing as
dependent variable
• Only surveys where minimum age of firms
is one year
• Excluding transition countries
• Excluding high and upper-middle income
countries
• Single establishment firms only
Individual or Family as Largest
Shareholder
Ln Firm Age
Owner Manager
Female Principal Owner
Line of Credit
0.037
[0.004]***
-0.027
[0.077]*
-0.027
[0.308]
Bank Finance
0.035
[0.004]***
0.005
[0.783]
-0.06
[0.081]*
Operations
Finance
-0.011
[0.276]
0.008
[0.642]
-0.027
[0.270]
Informal
Finance
-0.041
[0.000]***
-0.002
[0.907]
0.04
[0.096]*
12,399
0.3
14,129
13,772
14,129
0.16
0.09
0.14
Age*Female
Observations
Pseudo R2
Informal
Finance
-0.031
[0.000]***
-0.001
[0.926]
0.162
[0.065]*
-0.046
[0.075]*
14,129
0.14
Conclusions:
• Younger firms have less access to formal financing and rely
more on informal sources, such as family & friends.
• The business environment matters!
• Young firms have relatively greater access to bank financing
in countries with better Rule of Law and Credit Information.
• In countries with weak Credit information environments,
young firms rely relatively more on informal finance.
• Overall, our results suggest that improvements to the legal
environment and credit information infrastructure are
disproportionately beneficial for promoting access to formal
finance by young firms.