Transcript Comment on Finance, Firm Size, and Growth by Thorsten Beck, Asli Demirguc-Kunt, Luc Laeven and Ross Levine By Stijn Claessens World Bank Conference: Small and Medium Enterprises October.

Comment on
Finance, Firm Size, and Growth
by
Thorsten Beck, Asli Demirguc-Kunt,
Luc Laeven and Ross Levine
By Stijn Claessens
World Bank
Conference: Small and Medium Enterprises
October 14-15, 2004, World Bank
Findings
• Nice paper, fitting in with the approaches taken here
 Analyzes the role of financial sector development in
promoting the growth of SMEs
 Finds that financial sector development helps those
industries that have naturally more small firms
 Channel is not necessarily access to financing. Actually
small firms use less external financing (surprising to some
perhaps). Yet is also not some other firm characteristics
 Suggest role of finance is to monitor and (re-)allocate
• More good news for the importance of finance,
although news may not appeal to another (SME)
crowd, as it is more nuanced
Overall Comment
• Paper does not develop new theories, uses existing
methodology (RZ 1998), and does not collect many
new data collection (only firm size data for U.S. and
the U.K. from Compustat and census)
• Paper does not question literature, many of the other
papers here and elsewhere are consistent with message
• “New” findings
 Finance works especially for sectors with many small firms
 Banks more important for SMEs than stock markets
 Legal (efficiency and law and order) matter, but accounting
standards do not for sectors with small firms
Main Comment
• The interpretation is still tricky, though
 Do sectors with many small firms grow faster in general with
more finance? Do small firms in sectors with many small
firms grow faster with more finance? Or do we get more new,
small firms with more finance?
• Implications are different. How to sort out?
 Paper already looks at sectoral growth opportunities, thus
controlling for growth being correlated with sectors
 Why not look also at firm size and number of firms directly by
sector? Is average size change function of financial
development (RZ say no)? Or does average firm size not
change but more new firms emerge with more finance (RZ say
yes)? Differentiate sectors here by size distribution
Some Specific Comments
• Comments on empirics (referee style)
 It is another factor? Is it another industry characteristic? The
data are not perfectly aligned? How about different periods? Is
the role of growth opportunities? Is the US or the UK a
relevant benchmark to use (Canada?), etc. etc.
 But, many have already used this methodology, including
myself, and results seem robust to various alternative tests
 Still surprised on accounting index not significant
• One issue for cross-country is economies of scale
 Do/can smaller countries have the same distribution of firms?
How many auto plants or refineries can there be in Estonia? Is
this introducing some bias?
Overall Lessons
• Lessons for financial sector development can be further
developed
 Is it that finance fosters the move of resources, closes down
old and large firms, starts new and small firms?
 Or does more finance monitor the use of resources better so as
to foster growth of sector with more small firms?
• Or is it other aspects correlated with finance?
 Is more finance associated with less implicit Doing Business
type barriers for small firms (explicit can be tested)?
 Is there a deeper political economy explanation? Finance can
be an important barrier to entry, more subtle than other
barriers, making shallow/narrow financial system a symptom,
rather than a cause?
Going Forward on Research/Policy
• How to (better) analyze role of finance in SMEs?
 Using more data and surveys, WBVES/ICA-type, but
match also with the suppliers. Do it on individual
country level
 Use more behavioral type questions to reveal what SMEs
are truly willing to pay/their return on capital
 Study new (controlled) experiments: effects of better
collateral laws, a credit bureau with greater information,
changes in banking system structure (foreign entry,
changes in state-owned banks), etc.
 Learn on a more systematic basis from the many
EBRD/IFC/World Bank/others’ SME-“experiments”