Transcript Historical Financing of Small- and Medium-Size Enterprises Robert Cull, World Bank Lance E.

Historical Financing of Small- and
Medium-Size Enterprises
Robert Cull, World Bank
Lance E. Davis, Cal Tech and NBER
Naomi R. Lamoreaux, UCLA and NBER
Jean-Laurent Rosenthal, UCLA
What is the Principal Source of External Funds for
Small Firms? Shares of ICS Countries
0.5
0.4
0.3
0.2
0.1
0
Informal
Banks
Equity
Leasing/Trade
Credit
go
s
la
v
Bo ia
sn
Tu i a
r
G key
eo
R rgia
o
M ma
ac n
ed ia
o
Ta nia
nz
a
N ni a
N iger
ica ia
ra
g
U ua
ga
nd
a
Br
M azi
ol l
do
C va
Ba ro
ng atia
la
d
Et esh
h
H iopi
on a
du
Ec ras
ua
do
Ke r
ny
a
Yu
Share of Small Firm Funding for New Investment
from Banks
(ICS Countries that Reported Banks as Principal External Source)
0.4
0.3
0.2
0.1
0
Question:
To what extent are the small numbers of SMEs in
developing countries a result of the problems they face in
obtaining external funding—that is, of financing constraints
imposed on them by underdeveloped financial systems?
Average Employment by Establishment in
Selected Countries at the Beginning of the
Twentieth century
France
United
States
Britain
Germany
All firms in
the
censuses
26
67
Firms with
more than
20
workers
109
117
Firms with
more than
50
workers
185
176
64
14
N.A.
53
N.A
154
Findings about Historical Finance
of SMEs
• Most equity came from internal sources or through
personal connections—rarely from the securities
markets.
• Most external finance took the form of debt—supplied
mainly by small-scale institutions that were able to tap
into local, informal sources of information.
• These institutions emerged endogenously and wherever
there was significant demand by SMEs for finance.
• Responses to the demand for finance took very different
forms, depending on local circumstances and
institutions.
• Role of government was generally marginal.
SMEs Raised Equity Informally
• Formal markets not important for them, in part
because the size of their issues was too small to
sustain trade or make it worthwhile for traders to
invest in overcoming information asymmetries.
• More importantly, owners of SMEs most often
chose organizational forms that did not permit
tradable shares, such as partnerships, limited
partnerships, or private limited liability
companies.
New Multi-owner Firms in Paris 1833-2003
100%
90%
80%
70%
60%
50%
40%
30%
Others (Cooperatives...)
Special Corporations (SAS)
Corporations (SA)
Private Limited Companies (SARL)
Share Commandites
Commandites
Partnerships
20%
10%
0%
1833 1843 1853 1863 1873 1883 1893 1903 1913 1923 1933 1943 1953 1963 1973 1983 1993
Sources of Credit for SMEs
•SMES have little collateral:
–Assets are small and often have limited residual value.
–Access to credit depends on the wealth or reputation of their
owners.
•Institutions to leverage either wealth or
reputation were diverse.
–They were also abundant where SMES were
numerous.
•Lets look at some examples of this
diversity
Example 1: Notaries
• Recorders of private contracts so have very good local
information
• Notaries’ primary economic roles
– loan (asset) brokers.
– informational intermediation.
• When demand high ‘stray’ into more risky activities
– securities underwriting (Paris and big cities).
– short term debt (Southern France).
• Implication: bankruptcies, call for sanctions
– But Government intervention delayed until alternatives in place.
Not banks, but quantitative magnitude of market is large—in
1840, 650,000 loans, outstanding loans=25% GDP.
Example 2: RG DUN
• In most countries, the rise of information
providers occurs late (illegal in some countries)
• In the US, credit reporting agencies arise early
and allow for the large scale development of
commercial debt.
• Credit reporting agencies are not very reliable,
but the government does not create severe
sanctions for errors
Implication: facilitates the rise of trade credit and to
some extent competition among banks.
Example 3: local banks
• The rise of a large manufacturing sector in
a given locality is closely associated with
the rise of local banks.
– In the UK and the continent these are
proprietorships or partnerships.
– In the US they are most often corporations.
– Everywhere they are small.
• Have very good information because they
are imbedded in the local economy.
Digression: Insider Lending
• In most places each bank had a limited number
of industrial enterprises it supported. Thus early
commercial lending was most often insider
lending.
• Insider lending was an important mechanism to
reduce the cost of information to banks.
• In the North Atlantic core, the small scale of
banks and the relative ease of entry led to a
rapid growth in the number of banks and hence
to access to banking services.
Example 4: Savings Institutions,
Pawnshops and credit cooperatives
• Two roles
• Increased savings
– In all cases these institutions target middle class
savers and encourage asset accumulation.
– Do so by having either the state or the local elite
absorb administrative costs.
• Increased supply of capital. But to whom?
–
–
–
–
–
In France, the state
In Belgium, the Société Générale
In Germany ,much of it goes to SMEs
In the US, mostly to the real estate sector
In the UK, a bit more of a mix.
Implications of Local Finance
• Limited interregional flows does not allow
returns to equalize
– This problem is large in frontier economies like the
US, but less of an issue in long settled ones where
there is a lot wealth.
• Intermediaries prone to local shocks
– Correspondent networks reduce but do not eliminate
these problems
– Central banks don’t have the information to intervene
until much later
• Most likely rationing prevails
– Tempered by low entry barriers
• But we do get growth.
Financial Deserts
• Even in the North Atlantic Core, where financial
intermediaries were most abundant, their
geographical distribution is extremely uneven.
• Looking at regions that are under served can
help us understand whether demand plays an
important role.
• On the whole it seems that financial institutions
followed demand. Something that is less obvious
outside the core.
• Example the Massif Central
France
Without Paris
Southern Massif
Central
Ratio
Large bank Branches
In 1898
18.6
12.2
0.65
Bank of France
Discounts 1898
245 MF
69 MF
0.28
Credit Foncier de France, all loans 1853-98
Number of loans
1651
1534
0.92
Value of loans
44,5 MF
23.1 MF
0.52
Savings banks in 1898
Branches
15.4
15.19
0.98
Accounts
171,000
67,000
0.39
Value of accounts
93 MF
34.3 MF
0.47
All Bank branches
In 1829
18.3
10.26
0.56
In 1840
32.4
21.9
0.68
In 1898
70.7
64.5
0.91
Beyond the core
• The number of financial institutions seems
to be an order of magnitude smaller
– To be sure, less wealth => less finance
– To some extent more inequality => less
finance (because the rich make rather than
buy financial services)
• Government bears much of the blame in
some places
• This is particularly hard on SMEs
Conclusion
• Key Role of demand.
– Institutional innovation helps but even simple private banks can play a
key role.
– Government support alone does not create demand for financial
services
• Key role of institutional diversity
– Must resist the temptation to seek out the optimal form. It is probably
better to adapt local forms…because the first order effects are probably
available with any set of institutions.
• Difficulty of government intervention for SMEs
– administrative burden of dealing with plethora of firms.
– Local information not the government’s comparative advantage.
• Potential perverse effects of government intervention.
– Increase supply of funds to a few successful firms to reduce
administrative burden
– Impose uniform solutions so as to provide ‘transparency’ but at the
expense of local solutions.
– Regulation can be the first step to expropriation.