Abstract
In this paper, we study whether related variety affects firms’ fixed investment behaviour, and whether this relationship is linked also to the operational and organizational proximity between banks and local economies. By estimating different specifications of a dynamic investment equation on an unbalanced panel of Italian manufacturing firms for the period 2000–2007, we find that related variety boosts fixed investments by lowering their sensitivity to cash flow. This occurs because in technologically related areas banks benefit from lower screening and monitoring costs, easier re-allocation of property rights, and higher likelihood of establishing extended credit relationships with firms. However, we find also that the positive effect of related variety on investments disappears as the functional distance between local branches and their headquarters increases: more hierarchical and less embedded banks find it more difficult to collect tacit information on inter-firm production and financial linkages at the local level and therefore reduce credit provision.
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Notes
Since the book values of fixed capital for the first year of observation (1998) are expressed in historical prices, we multiplied the values by a factor of 1.251 to account for inflation. This provides estimates of corresponding replacement values.
Prometeia is a private knowledge company located in Bologna (Italy) specialized in macroeconomic analyses and financial consultancy: www.prometeia.it.
See Bond and Reenen (2007) for a review of the microeconometric models used to estimate dynamic investment equations.
As is known, this is a solution to the standard firm’s profit maximization problem.
Firm sales are deflated using 2-digit production prices drawn from ISTAT.
The real user cost of capital is defined as follows:
$$\begin{aligned} r_{st}=\frac{p_{kt} }{p_{yst} }\frac{(i_{t} -\dot{p}_{t} +\delta )(1-{A}\cdot {tax}_{t} )}{(1-tax_{t} )} \end{aligned}$$where \(p_{k}\) and \(p_{y}\) are investment and output prices, \(i\) is the nominal interest rate, \(p\) is the inflation rate, \(\delta \) is the physical depreciation rate, \(A\) is the present value of investment allowances per unit of investment, and tax is the statutory corporate tax rate (which includes the fiscal incentives for investment). User costs are calculated for each industry, using the Italian ATECO2007 classification (based on NACE rev. 2).
Alessandrini et al. (2009) find that a higher number of banks for population increases the sensitivity of investments to cash flow, whereas a higher number of banks per square kilometer works in the opposite direction. Other studies provide additional evidence of an ambiguous effect of operational proximity on credit rationing (Petersen and Rajan 2002; Giroud 2013).
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Antonietti, R., Cainelli, G., Ferrari, M. et al. Banks, related variety and firms’ investments. Lett Spat Resour Sci 8, 89–99 (2015). https://doi.org/10.1007/s12076-014-0130-2
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DOI: https://doi.org/10.1007/s12076-014-0130-2