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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
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Financing patterns around the world: Are small firms different?
TL;DR: In this article, the authors investigate how financial and institutional development affects the financing of large and small firms and find that protection of property rights increases external financing of small firms significantly more than of large firms, mainly due to its effect on bank finance.
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Perspectives on China's outward foreign direct investment
TL;DR: Wang et al. as discussed by the authors examined China's savings rate, corporate ownership structures, and bank-dominated capital allocation and found that the most active players have incentives to conduct excessive outward FDI while capital constraints limit players that most likely have value-creating FDI opportunities.
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Firm Innovation in Emerging Markets: The Role of Finance, Governance, and Competition
TL;DR: In this article, the authors investigate the firm characteristics associated with innovation in over 19,000 firms across 47 developing economies and find that access to external financing is associated with greater firm innovation.
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Does environmental regulation drive away inbound foreign direct investment? Evidence from a quasi-natural experiment in China
TL;DR: In this paper, the authors investigated whether environmental regulation affects inbound foreign direct investment and found that tougher environmental regulation leads to less FDI in countries with better environmental protections than China.
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Small vs. Young Firms across the World : Contribution to Employment, Job Creation, and Growth
TL;DR: In this article, the authors investigated the contribution of small firms to employment, job creation, and growth in developing countries, and found that small firms have the largest shares of job creation and highest sales growth and employment growth, even after controlling for firm age.
References
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Posted Content
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Formal–informal sector interaction in rural credit markets
TL;DR: The authors showed that when such borrowers differ in their likelihood of default, and the moneylenders are asymmetrically informed about the client-specific degree of risk, the policy of providing cheap credit through the formal sector can generate adverse ''composition effects'' which worsen the terms of credit and the availability of loans in the informal sector.
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Symbiosis vs. crowding-out: the interaction of formal and informal credit markets in developing countries
TL;DR: This paper proposed a model in which the formal sector's superior ability in deposit mobilization is traded off against the informational advantage that lenders in the informal sector enjoy, and used the model to predict how the market structure responds to changes in the environment, and consider the policy implications of various forms of government intervention.