Abstract
A large literature provides empirical evidence that financial development enhances welfare by stimulating economic efficiency and offering more profitable growth opportunities, although the issues of identifying the exact mechanisms through which finance enhances welfare and dealing with the simultaneity between financial development and growth still remain contentious. This paper takes a firm-level approach to study the link between financing sources and firm growth in India. We start by observing that (domestic) financial underdevelopment should not necessarily constrain all firms’ growth opportunities equally, given they can also access other non-bank finance sources such as retained earnings, foreign finance and government borrowings. Similarly, it is unrealistic to assume that similar financial structure will generate homogenous effects across firms. These considerations motivate our research questions of whether financing sources matter for firms’ productivity growth and whether this depends on firm characteristics such as ownership and size. We answer these questions using a rich micro panel data set and employing econometric techniques that deal with the potential reverse causality from financial structure to productivity growth. We find that relative to retained earnings, bank and nonbank finances positively affect firm level productivity growth with bank loans having the largest and government borrowings the least effect on growth. Size is found to play a mediating role in the finance-growth nexus: access to bank loans (nonbank finance) disproportionately benefits smaller (bigger) firms. Further analysis around ownership structure suggests that all else equal, it would appear that financial structure matters only for the growth of domestic private firms.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
See Levine (2005) for a review.
Other variables used in the literature include initial TFP level to control for firms’ technological endowment, exporting to capture the expected performance-enhancing effects of export activities that have been widely documented across a number of countries, and innovation (measured as the percentage of R&D expenditure) to test the presence of innovation-driving growth (e.g. Jovanovic 1982). These variables were included in other regressions, but excluded from our main results as they were not significant.
To the authors’ best knowledge, this is the only available econometric technique for tackling problems associated with censored regressors which are also endogenous. However see Rigobon and Stoker (2007) for an alternative treatment of the regression with exogenous censored regressors.
Given four financing sources in our case, the share of internal finance is omitted from estimation.
The organised sector here refers to firms that submit financial statements.
These include hire purchase loans, deferred credit, debentures and bonds, borrowings syndicated across banks and institutions, loans from promoters/directors/shareholders, inter-corporate loans, commercial papers, fixed deposits, as well as borrowings from foreign sources.
The distinction between group affiliation and non-group affiliation is important as some studies have found that group-affiliated firms enjoy exceptional access to government and foreign loans (e.g. Manos et al. 2007).
About 35 % of firms in the data set belong to either an Indian business group or a foreign business house.
There is a large variation in the age of the firms, with quite a few firms over 100 years old (the oldest firm is 182 years of age).
All monetary values in Prowess are expressed in Rupees crore (1 crore equals 10 millions rupees).
This observation from our data set is in contrast to Allen et al. (2012b) who report (albeit over a shorter period from 2001 to 2006) that alternative finance is the most important source of external finance followed by bank loans. Note that our definition of alternative finance differs from these authors.
These figures are obtained by multiplying the coefficients on bank loans and non-bank loans from column (6) with their respective standard deviations (Table 1).
References
Allen F, Qian J, Qian M (2005) Law, finance and economic growth in China. J Financ Econ 77:57–116
Allen F, Carletti E, Qian J, Valenzuela P (2012a) Financial intermediation, markets and alternative financial sectors. Wharton Financial Institution Working Paper 12-05, Wharton School, University of Pennsylvania
Allen F, Chakrabarti R, De S, Qian J, Qian M (2012b) Financing firms in India. J Financ Intermed 21:409–445
Ayyagari M, Demirgüç-Kunt A, Maksimovic V (2008) How important are financing constraints? The role of finance in the business environment. World Bank Econ Rev 22(3):483–516
Ayyagari M, Demirgüç-Kunt A, Maksimovic V (2010) Formal versus informal finance: evidence from China. Rev Financ Stud 23(10):3048–3097
Beck T, Demirguc-Kunt A (2006) Small and medium-size enterprises: access to finance as a growth constraint. J Bank Financ 30:2931–2943
Beck T, Dermiguc-Kunt A, Maksimovic V (2005) Financial and legal constraints to firm growth: does size matter? J Financ 60:137–177
Cabral L, Mata J (2003) On the evolution of the firm size distribution. Am Econ Rev 93:1075–1090
Caves RE (1998) Industrial organization and new findings on turnovers and mobility of firms. J Econ Lit 36(4):1947–1982
Demirgüç-Kunt A, Maksimovic V (1998) Law, finance and firm growth. J Financ 53:2107–2137
Du J, Girma S (2012) Firm size, source of finance and growth: evidence from China. Int J Econ Bus 19(3):397–419
Evans D (1987) The relationship between firm growth, size and age: estimates for 100 manufacturing industries. J Ind Econ 35:567–581
Geroski PA (1995) What do we know about entry? Int J Ind Organ 13:421–440
Harris M, Raviv A (1990) Capital structure and the informational role of debt. J Financ 45(2):321–349
Hart O (1995) Corporate governance: some theory and implications. Econ J 105(430):678–689
Jayaratne J, Strahan PE (1996) The finance-growth nexus: evidence from bank branch deregulation. Q J Econ 111:639–670
Jensen MC, Meckling W (1976) Theory of the firm: managerial behavior, agency costs and ownership structure. J Financ Econ 3:305–360
Jovanovic B (1982) Selection and the evolution of industry. Econometrica 50(3):649–670
King R, Levine R (1993) Finance and growth: Schumpeter might be right. Q J Econ 108:717–738
Levine R (2005) Finance and growth: theory and evidence. In: Aghion P, Durlauf S (eds) Handbook of economic growth 1(1). Elsevier Science, The Netherlands, pp 865–934
Levine R, Zervos S (1998) Stock markets, banks and economic growth. Am Econ Rev 88(3):537–558
Levine R, Loaysa N, Beck T (2000) Financial intermediation and growth: causality and causes. J Monet Econ 46:31–77
Levinsohn J, Petrin A (2003) Estimating production functions using inputs to control for unobservables. Rev Econ Stud 70(2):317–341
Majumdar SK, Chhibber P (1999) Capital structure and performance: evidence from a transitional economy on an aspect of corporate governance. Public Choice 98:287–305
Manos R, Murinde V, Green CJ (2007) Leverage and business groups: evidence from Indian firms. J Econ Bus 59:443–465
Modigliani F, Miller MH (1958) The cost of capital, corporation finance, and the theory of investment. Am Econ Rev 48:261–297
Olley S, Pakes A (1996) The dynamics of productivity in the telecommunications equipment industry. Econometrica 64:1263–1297
Oura H (2008) Financial development and growth in India: a growing tiger in a cage? IMF Working Paper 08/79, International Monetary Fund, Washington, DC
Rajan R, Zingales L (1998) Financial dependence and growth. Am Econ Rev 88:559–586
Rajan R, Zingales L (2001) The influence of the financial revolution on the nature of firms. Am Econ Rev 91:206–211
Rigobon R, Stoker TM (2007) Estimation with censored regressors: basic issues. Int Econ Rev 48(4):1441–1467
Rivers D, Vuong QH (1988) Limited information estimators and exogeneity tests for simultaneous probit models. J Econom 39:347–366
Rousseeuw PJ, Leroy AM (1987) Robust regression and outlier detection. Wiley, New York
Smith R, Blundell R (1986) An exogeneity test for a simultaneous equation Tobit model with an application to labour supply. Econometrica 54:679–685
Stulz R (1990) Managerial discretion and optimal financing policies. J Financ Econ 26:3–27
Wooldridge JM (2002) Econometric analysis of cross section and panel data. MIT Press, Cambridge
Wooldridge J M (2008) Instrumental variables estimation of the average treatment effect in correlated random coefficient models. In: Millimet D, Smith J, Vytlacil E (eds) Elsevier, Amsterdam, pp 93–116
Author information
Authors and Affiliations
Corresponding author
Appendix
Rights and permissions
About this article
Cite this article
Girma, S., Vencappa, D. Financing sources and firm level productivity growth: evidence from Indian manufacturing. J Prod Anal 44, 283–292 (2015). https://doi.org/10.1007/s11123-014-0418-7
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11123-014-0418-7