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Effect of credit guarantee policy on survival and performance of SMEs in Republic of Korea

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An Erratum to this article was published on 26 September 2008

Abstract

This study evaluates the effect of credit guarantee on SMEs at the firm level. To estimate the effect of credit guarantee, we analyze relations between credit guarantee, the survival of guaranteed firms, and their productive performance. The result indicates that credit guarantee frequency enabled guaranteed firms to achieve good performances in general. On the contrary, the effect of guarantee amounts is ambiguous in that there is difference between the contemporary effect and the lagged effect. Therefore, we conclude that credit guarantee satisfied partially its goal to alleviate SMEs’ difficulty in acquiring finance and to stabilize employment.

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Notes

  1. Policy loans include not only credit guarantees but also all other funds provided by the government or public institutions.

  2. Analysis across countries as well as industries is conducted for Portugal (Mata et al., 1995), for Italy (Audretsch et al., 1999), for Sweden (Heshmati, 2001), for Japan (Honjo, 2000), for Korea (Lee, 2003), and for OECD countries (Bartelsman et al., 2005).

  3. According to Gudger (1998), additionality means that “a small investment in a guarantee institution’s capital and/or on-going administrative support to guarantee institutions can produce a significantly larger volume of lending to a credit constrained sector than would have been achieved without such guarantees”.

  4. Hong et al. (2003) indicated that only indirect effect is considered in input-output analysis, which might underestimate the outcomes. On the other side, fixed prices enable to overestimate the effects.

  5. Credit Guarantee Identification (CGI) is 0 if a firm receives credit guarantee from KCGF, 1 if a firm receives credit guarantee from KOTEC. KSIC is two digits. When location is considered, firms are divided into 5 categories. Seoul, Gyunggi, Inchon constitute first, Gangwon is second, Daejeon, Chungnam, and Chungbuk are third, fourth is consist of Busan, Daegu, Ulsan, Gyungnam, and Gyungbuk, Gwangju, Jeonnam, and Jeonbuk are fifth regions. Size number varies from 1 to 15 according to the number of employees. Bankruptcy is 1 if the firm is bankrupt and 0 if not.

  6. Credit guarantee institutions do not require all detailed information at once in the first part of their application since determination of acceptance or rejection to provide credit guarantee proceeds in a number of steps. The datasets include information only on accepted applications rather than on all applicants.

  7. Korea Securities Dealers association Automated Quotation (KOSDAQ) is an alternative source of finance for SMEs which are not listed on the Korea Securities Exchange (KSE). It is an electronic trading system benchmarking NASDAQ in U.S.

  8. The value of financial variables is transformed into constant 2004 prices using yield of treasury-bond (3 years). For the reasons of simplification of the notation, the firm (f) subscript is omitted from all equations.

  9. Predicted value of credit guarantee amount is used instead in case that the credit guarantee amount variable is endogenous.

  10. The cohort (firm) subscript is excluded in order to simplify. In model 1, the lagged variable of credit guarantee amount is omitted.

  11. All explanatory variables except millsr are same as those explained in Eq. 3.

  12. Usually, the number of employee is used for firm size. However, we use logarithmic sales as firm size since (1) credit guarantee institutions consider total sales more than the number of employees in actual evaluations and (2) there is high correlation between sales and the number of employees (see Table A5).

  13. In Korea, firms are classified according to the number of regular employees. If the number of employees is less than 50, a firm is classified as a micro enterprise. In general, SMEs have less than 300 employees.

  14. Of course, there are differences across industries.

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Acknowledgements

A previous version of this article was presented at the Far Eastern Meeting of the Econometric Society in Beijing, July 11, 2006. The authors wish to express gratitude to Dr. G. G. Choi for providing data and useful references. For helpful comments on this article, we are grateful to Dr. Marco Vivarelli and two anonymous referees for the journal. Needless to say, any remaining errors are our own.

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Authors and Affiliations

  1. Technology Strategy and Planning Division, Korea Institute of Industrial Technology Evaluation & Planning, 13F KOTECH Bldg. 701-7, Yeoksam-Dong, Gangnam-Gu, Seoul, 135-080, Rebublic of Korea

    Jae Won Kang

  2. Economics & Finance, University of Kurdistan Hawler, Hawler, Federal Region of Kurdistan, Iraq

    Almas Heshmati

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  1. Jae Won Kang
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  2. Almas Heshmati
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Correspondence to Jae Won Kang.

Additional information

An erratum to this article can be found at http://dx.doi.org/10.1007/s11187-008-9144-8

Appendix

Appendix

Table A1 Distribution of firms by sector, data type and funds
Full size table
Table A2 Distribution of firms by location, type of data and funds
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Table A3 Distribution of firms by size, type of data and funds
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Table A4 Distribution of firms by year, type of data and funds
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Table A5 Correlation between variables
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Kang, J.W., Heshmati, A. Effect of credit guarantee policy on survival and performance of SMEs in Republic of Korea. Small Bus Econ 31, 445–462 (2008). https://doi.org/10.1007/s11187-007-9049-y

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