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Formal versus Informal Finance: Evidence from China
TLDR
In this paper, the authors take a closer look at firm financing patterns and growth using a database of 2,400 Chinese firms and find that a relatively small percentage of firms in the sample utilize formal bank finance with a much greater reliance on informal sources.Abstract:
China is often mentioned as a counter-example to the findings in the finance and growth literature since, despite the weaknesses in its banking system, it is one of the fastest growing economies in the world. The fast growth of Chinese private sector firms is taken as evidence that it is alternative financing and governance mechanisms that support China's growth. This paper takes a closer look at firm financing patterns and growth using a database of 2,400 Chinese firms. The authors find that a relatively small percentage of firms in the sample utilize formal bank finance with a much greater reliance on informal sources. However, the results suggest that despite its weaknesses, financing from the formal financial system is associated with faster firm growth, whereas fund raising from alternative channels is not. Using a selection model, the authors find no evidence that these results arise because of the selection of firms that have access to the formal financial system. Although firms report bank corruption, there is no evidence that it significantly affects the allocation of credit or the performance of firms that receive the credit. The findings suggest that the role of reputation and relationship based financing and governance mechanisms in financing the fastest growing firms in China is likely to be overestimated.read more
Citations
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Does Finance Really Matter for the Participation of SMEs in International Trade? Evidence from 8,080 East Asian Firms
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Does innovation promote access to informal loans? Evidence from a transitional economy
Ly Kim Cuong,Hoang Tran Hau +1 more
TL;DR: In this paper, the authors examined the way innovation can promote access to informal loans and found that more innovative firms are less likely to seek informal loans for their funding needs. But they also found that older firms and formal firms are more likely to obtain informal loans, and they suggested that government provides firms with more governmental support to stimulate the transparency of the credit market via financial institutions.
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Financial Deepening, Asset Price Inflation, and Economic Convergence: Empirical Analysis Based on China’s Experience
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References
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Financial Intermediation and Delegated Monitoring
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Financial Dependence and Growth
Raghuram G. Rajan,Raghuram G. Rajan,Raghuram G. Rajan,Luigi Zingales,Luigi Zingales,Luigi Zingales +5 more
TL;DR: This paper examined whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship; that financial development reduces the costs of external finance to firms, and found that industrial sectors that are relatively more in need of foreign finance develop disproportionately faster in countries with more developed financial markets.