Financial Integration and Entrepreneurial Activity: Evidence from Foreign Bank Entry in Emerging Markets

While the positive growth effects of financial integration are extensively documented, little is known of its impact on small and young firms. This paper aims to fill this void relying on a panel of 60,000 firm-year observations on listed and unlisted companies in Eastern European economies to assess the differential impact of foreign bank lending on firm growth and financing. Foreign lending stimulates growth in firm sales, assets, and use of financial debt even though the effect is dampened for small firms. More strikingly, young firms benefit most from foreign bank presence, while businesses connected to domestic banks or to the government suffer. Overall, our findings suggest that foreign banks can help to mitigate connected-lending problems and to improve capital allocation.

[1]  Vikrant Vig,et al.  How Law Affects Lending , 2008 .

[2]  Kristin J. Forbes,et al.  One cost of the Chilean capital controls: Increased financial constraints for smaller traded firms , 2007 .

[3]  F. Boissay,et al.  Is Lending in Central and Eastern Europe Developing Too Fast , 2006 .

[4]  Iman van Lelyveld,et al.  Foreign Banks and Credit Stability in Central and Eastern Europe: A Panel Data Analysis , 2006 .

[5]  Hernán Ortiz-Molina,et al.  Lending to small businesses: the role of loan maturity in addressing information problems , 2006 .

[6]  Todd Mitton.  Stock Market Liberalization and Operating Performance at the Firm Level , 2005 .

[7]  António Afonso,et al.  Cross-Country Efficiency of Secondary Education Provision: A Semi-Parametric Analysis with Non-Discretionary Inputs , 2005 .

[8]  B. Hayo,et al.  Unions, Wage Setting and Monetary Policy Uncertainty , 2005, SSRN Electronic Journal.

[9]  A. Schabert.  Money Supply and the Implementation of Interest Rate Targets , 2005, SSRN Electronic Journal.

[10]  Andrea Schaechter,et al.  Too Much of a Good Thing? Credit Booms in Transition Economies: The Cases of Bulgaria, Romania, and Ukraine , 2005, SSRN Electronic Journal.

[11]  P. Mizen,et al.  Corporate Investment and Cash Flow Sensitivity: What Drives the Relationship? , 2005, SSRN Electronic Journal.

[12]  A. Sutherland,et al.  Computing Second-Order-Accurate Solutions for Rational Expectation Models Using Linear Solution Methods , 2005, SSRN Electronic Journal.

[13]  Huw Dixon,et al.  Persistence and Nominal Inertia in a Generalized Taylor Economy: How Longer Contracts Dominate Shorter Contracts , 2005, SSRN Electronic Journal.

[14]  Marcin Kolasa.  What Drives Productivity Growth in the New EU Member States? The Case of Poland , 2005, SSRN Electronic Journal.

[15]  A. Banerjee,et al.  Forecasting Macroeconomic Variables for the New Member States of the European Union , 2005, SSRN Electronic Journal.

[16]  Marcel Fratzscher,et al.  Communication and Decision-Making by Central Bank Committees: Different Strategies, Same Effectiveness? , 2005, SSRN Electronic Journal.

[17]  C. Walsh.  Parameter Misspecification and Robust Monetary Policy Rules , 2005, SSRN Electronic Journal.

[18]  F. Mongelli,et al.  Endogeneities of Optimum Currency Areas: What Brings Countries Sharing a Single Currency Closer Together? , 2005, SSRN Electronic Journal.

[19]  Frank Schorfheide,et al.  NBER WORKING PAPER SERIES MONETARY POLICY ANALYSIS WITH POTENTIALLY MISSPECIFIED MODELS , 2007 .

[20]  Kristoffer P. Nimark.  Calvo Pricing and Imperfect Common Knowledge: A Forward Looking Model of Rational Inflation Inertia , 2005, SSRN Electronic Journal.

[21]  Gonzalo Camba-Mendez,et al.  Structural Filters for Monetary Analysis: The Inflationary Movements of Money in the Euro Area , 2005, SSRN Electronic Journal.

[22]  António Afonso,et al.  Fiscal Consolidations in the Central and Eastern European Countries , 2005, SSRN Electronic Journal.

[23]  Jarkko Turunen,et al.  Real Wages and Local Unemployment in the Euro Area , 2005, SSRN Electronic Journal.

[24]  A. Calza,et al.  Output and Inflation Responses to Credit Shocks: Are There Threshold Effects in the Euro Area? , 2005, SSRN Electronic Journal.

[25]  Ken Nyholm,et al.  Yield Curve Prediction for the Strategic Investor , 2005, SSRN Electronic Journal.

[26]  T. Peltonen,et al.  Socio-Economic Development and Fiscal Policy: Lessons from the Cohesion Countries for the New Member States , 2005, SSRN Electronic Journal.

[27]  Timothy Cogley,et al.  The Conquest of U.S. Inflation: Learning and Robustness to Model Uncertainty , 2005, SSRN Electronic Journal.

[28]  Patrick Lunnemann,et al.  Regulated and Services' Prices and Inflation Persistence , 2005, SSRN Electronic Journal.

[29]  M. Roma,et al.  Does Product Market Competition Reduce Inflation? Evidence from EU Countries and Sectors , 2005, SSRN Electronic Journal.

[30]  J. Pearlman.  Central Bank Transparency and Private Information in a Dynamic Macroeconomic Model , 2005, SSRN Electronic Journal.

[31]  Johann Scharler,et al.  The Price-Setting Behavior of Austrian Firms: Some Survey Evidence , 2005, SSRN Electronic Journal.

[32]  E. Dhyne,et al.  Time-Dependent versus State-Dependent Pricing: A Panel Data Approach to the Determinants of Belgian Consumer Price Changes , 2005, SSRN Electronic Journal.

[33]  Melanie E. Ward-Warmedinger,et al.  Part-Time Work in EU Countries: Labour Market Mobility, Entry and Exit , 2005, SSRN Electronic Journal.

[34]  Lei Zhang,et al.  Capital Flows and the Us 'New Economy': Consumption Smoothing and Risk Exposure , 2005, SSRN Electronic Journal.

[35]  Silvia Fabiani,et al.  Consumer Price Behaviour in Italy: Evidence from Micro CPI Data , 2005, SSRN Electronic Journal.

[36]  V. Wieland,et al.  Insurance Policies for Monetary Policy in the Euro Area , 2005, SSRN Electronic Journal.

[37]  Luc Aucremanne,et al.  Price-Setting Behaviour in Belgium: What Can Be Learned from an Ad Hoc Survey ? , 2005 .

[38]  F. Boissay,et al.  The French Block of the Escb Multi-Country Model , 2005, SSRN Electronic Journal.

[39]  Daniel A. Dias,et al.  Using Mean Reversion as a Measure of Persistence , 2005, SSRN Electronic Journal.

[40]  Sandrine Corvoisier,et al.  Breaks in the Mean of Inflation: How They Happen and What to Do with Them , 2005, SSRN Electronic Journal.

[41]  P. Mcadam,et al.  The Performance and Robustness of Interest-Rate Rules in Models of the Euro Area , 2005, SSRN Electronic Journal.

[42]  Klaus Adam,et al.  Experimental Evidence on the Persistence of Output and Inflation , 2005, SSRN Electronic Journal.

[43]  Frank Schorfheide,et al.  On the Fit and Forecasting Performance of New Keynesian Models , 2005, SSRN Electronic Journal.

[44]  Philip E. Strahan,et al.  How Law and Institutions Shape Financial Contracts: The Case of Bank Loans , 2005 .

[45]  Asli Demirgüç-Kunt,et al.  Finance, Firm Size, and Growth , 2004 .

[46]  B. Esty.  When Do Foreign Banks Finance Domestic Projects? New Evidence on the Importance of Legal and Financial Systems , 2004 .

[47]  Atif R. Mian.  Distance Constraints: The Limits of Foreign Lending in Poor Economies , 2004 .

[48]  Mara Faccio,et al.  Politically Connected Firms , 2004 .

[49]  Marianne Bertrand,et al.  Banking Deregulation and Industry Structure: Evidence from the French Banking Reforms of 1985 , 2004 .

[50]  A. Simonov,et al.  Which Investors Fear Expropriation? Evidence from Investors' Portfolio Choices , 2004 .

[51]  Paola Sapienza,et al.  The effects of government ownership on bank lending , 2004 .

[52]  Giovanni Dell'Ariccia,et al.  Information and Bank Credit Allocation , 2004 .

[53]  Philip E. Strahan.  Comment on Berger, Hasan, and Klapper , 2004 .

[54]  Iftekhar Hasan,et al.  Privatization Matters: Bank Efficiency in Transition Countries , 2004 .

[55]  Leora F. Klapper,et al.  Entry Regulation as a Barrier to Entrepreneurship , 2004 .

[56]  Leora F. Klapper,et al.  Business Environment and Firm Entry: Evidence from International Data , 2004 .

[57]  Bert Scholtens,et al.  How Important are Foreign Banks in the Financial Development of European Transition Countries? , 2003, SSRN Electronic Journal.

[58]  A. Unite,et al.  The effect of foreign entry and ownership structure on the Philippine domestic banking market , 2003 .

[59]  Paul A. Gompers,et al.  Institutions, Capital Constraints and Entrepreneurial Firm Dynamics: Evidence from Europe , 2003 .

[60]  J. Liberti.  Initiative, Incentives and Soft Information: How Does Delegation Impact the Role of Bank Relationship Managers? , 2003 .

[61]  T. Beck,et al.  Bank Concentration and Crises , 2003 .

[62]  Leora F. Klapper,et al.  Further Evidence on the Link between Finance and Growth: An International Analysis of Community Banking and Economic Performance , 2003 .

[63]  I. Lelyveld,et al.  Foreign Banks and Credit Stability in Central and Eastern Europe: Friends or Foes? A Panel Data Analysis , 2003 .

[64]  Philip E. Strahan,et al.  Foreign Bank Entry and Business Volatility: Evidence from U.S. States and Other Countries , 2003 .

[65]  A. Simonov,et al.  Which Investors Fear Expropriation? Evidence from Investors' Stock Picking , 2003 .

[66]  P. Wachtel,et al.  Financial Sector Development in Transition Economies: Lessons from the First Decade , 2002 .

[67]  S. Ongena,et al.  Distance, Lending Relationships and Competition , 2002 .

[68]  Maria Soledad Martinez Peria,et al.  Banking on Foreigners: The Behavior of International Bank Lending to Latin America, 1985-2000 , 2002 .

[69]  P. Henry,et al.  Risk Sharing and Asset Prices: Evidence from a Natural Experiment , 2002 .

[70]  Mariassunta Giannetti,et al.  Do Better Institutions Mitigate Agency Problems? Evidence from Corporate Finance Choices , 2002, Journal of Financial and Quantitative Analysis.

[71]  Allen N. Berger,et al.  To What Extent Will the Banking Industry Be Globalized? A Study of Bank Nationality and Reach in 20 European Nations , 2002 .

[72]  Paola Sapienza,et al.  Does Local Financial Development Matter? , 2002 .

[73]  R. La Porta,et al.  Related Lending , 2002 .

[74]  Asli Demirgüç-Kunt,et al.  Financial and Legal Constraints to Firm Growth: Does Size Matter? , 2002 .

[75]  G. Clarke,et al.  Bank Lending to Small Businesses in Latin America: Does Bank Origin Matter? , 2002 .

[76]  L. Goldberg,et al.  Has Foreign Bank Entry Led to Sounder Banks in Latin America? , 2002 .

[77]  Allen N. Berger,et al.  Does Function Follow Organizational Form? Evidence from the Lending Practices of Large and Small Banks , 2002 .

[78]  L. Laeven.  Does Financial Liberalization Reduce Financing Constraints? , 2001 .

[79]  Maria Soledad Martinez Peria,et al.  Foreign Bank Entry: Experience, Implications for Developing Countries, and Agenda for Further Research , 2001 .

[80]  Robert Cull,et al.  Does Foreign Bank Penetration Reduce Access to Credit in Developing Countries? Evidence from Asking Borrowers , 2001 .

[81]  Allen N. Berger,et al.  Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure , 2001 .

[82]  Leora F. Klapper,et al.  The Ability of Banks to Lend to Informationally Opaque Small Businesses , 2001 .

[83]  H. Kee.  The Regulation and Supervision of Banks Around the World - a New Database , 2001 .

[84]  Allen N. Berger,et al.  The Effects of Dynamic Changes in Bank Competition on the Supply of Small Business Credit , 2001 .

[85]  Oscar Landerretche,et al.  Lending Booms: Latin America and the World , 2001 .

[86]  R. Rajan,et al.  The Great Reversals: The Politics of Financial Development in the 20th Century , 2001 .

[87]  V. Aivazian,et al.  Capital Structures in Developing Countries , 2001 .

[88]  L. Laeven.  Insider Lending and Bank Ownership: The Case of Russia☆ , 2001 .

[89]  James R. Barth,et al.  The Regulation and Supervision of Banks around the World: A New Database , 2001 .

[90]  J. Bonin,et al.  Retail Banking in Hungary: A Foreign Affair? , 2000 .

[91]  Allen N. Berger,et al.  The Effects of Geographic Expansion on Bank Efficiency , 2000 .

[92]  Allen N. Berger,et al.  The Dynamics of Market Entry: The Effects of Mergers and Acquisitions on Entry in the Banking Industry , 2000 .

[93]  D. Robinson,et al.  What is the Price of Hubris? Using Takeover Battles to Infer Overpayments and Synergies , 2000 .

[94]  M. Petersen,et al.  Does Distance Still Matter? The Information Revolution in Small Business Lending , 2000 .

[95]  J. Stein,et al.  Information Production and Capital Allocation: Decentralized vs. Hierarchical Firms , 2000 .

[96]  P. Henry.  Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices , 2000 .

[97]  Katharina Pistor.  Patterns of Legal Change: Shareholder and Creditor Rights in Transition Economies , 2000, Corporate Governance Lessons from Transition Economy Reforms.

[98]  M. Raiser,et al.  Law and Finance in Transition Economies , 2000 .

[99]  Andrei Shleifer,et al.  Government Ownership of Banks , 2000 .

[100]  H. Huizinga,et al.  Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence , 1999 .

[101]  Allen N. Berger,et al.  The Consolidation of the Financial Services Industry: Causes, Consequences, and Implications for the Future , 1998 .

[102]  Eric S. Rosengren,et al.  Bank consolidation and small business lending: It's not just bank size that matters , 1998 .

[103]  Stijn Claessens,et al.  How Does Foreign Entry Affect the Domestic Banking Market? , 1998 .

[104]  Allen N. Berger,et al.  The Economics of Small Business Finance: The Roles of Private Equity and Debt Markets in the Financial Growth Cycle , 1998 .

[105]  Philip E. Strahan,et al.  What Drives Deregulation? Economics and Politics of the Relaxation of Bank Branching Restrictions , 1997 .

[106]  Kenneth S. Rogoff,et al.  Foundations of International Macroeconomics , 1997 .

[107]  Luigi Zingales,et al.  Financial Dependence and Growth , 1996 .

[108]  Philip E. Strahan,et al.  The Finance-Growth Nexus: Evidence from Bank Branch Deregulation , 1996 .

[109]  Florencio López‐de‐Silanes,et al.  Law and Finance , 1996, Journal of Political Economy.

[110]  Allen N. Berger,et al.  Universal Banking and the Future of Small Business Lending , 1995 .

[111]  M. Petersen,et al.  The Benefits of Lending Relationships: Evidence from Small Business Data , 1994 .

[112]  J. Stock,et al.  Instrumental Variables Regression with Weak Instruments , 1994 .

[113]  Robert G. King,et al.  Finance, entrepreneurship and growth , 1993 .

[114]  H. Broadman,et al.  Finance and Growth: Schumpeter Might Be Right , 1993 .

[115]  I. Hernando,et al.  EUROSYSTEM INFLATION PERSISTENCE NETWORK DO DECREASING HAZARD FUNCTIONS FOR PRICE CHANGES MAKE ANY SENSE? 1 , 2005 .

[116]  J. P. García.  Early-warning tools to forecast General Government deficit in the euro area , 2005 .

[117]  EUROSYSTEM INFLATION PERSISTENCE NETWORK MEASURING INFLATION PERSISTENCE A STRUCTURAL TIME SERIES APPROACH 1 , 2005 .

[118]  Diego Martínez‐López.  Fiscal federalism and public inputs provision: vertical externalities matter , 2005 .

[119]  EUROSYSTEM INFLATION PERSISTENCE NETWORK BREAK IN THE MEAN AND PERSISTENCE OF INFLATION , 2005 .

[120]  C. Glymour,et al.  FINANCE AND GROWTH: THEORY AND EVIDENCE , 2005 .

[121]  R. Sundaram,et al.  On the Capital-Structure Implications of Bankruptcy Codes , 2004 .

[122]  C. Green,et al.  Are foreign banks in central and eastern Europe more efficient than domestic banks , 2003 .

[123]  B. Esty.  When Do Foreign Banks Finance Domestic Investment ? New Evidence on the Importance of Legal and Financial Systems , 2002 .

[124]  Allen N. Berger,et al.  Small business credit availability and relationship lending: the importance of bank organizational structure , 2001 .

[125]  Paul R. Masson,et al.  Open Doors: Foreign Participation in Financial Systems in Developing Countries , 2001 .

[126]  Peter Blair Henry.  Do Stock Market Liberalizations Cause Investment Booms , 2000 .

[127]  Vojislav Maksimovic,et al.  Capital Structure in Developing Countries , 1999 .

[128]  Eric S. Rosengren,et al.  Small business credit availability: how important is size of lender? , 1995 .

[129]  David A. Jaeger,et al.  Problems with Instrumental Variables Estimation when the Correlation between the Instruments and the Endogenous Explanatory Variable is Weak , 1995 .

[130]  Allen N. Berger,et al.  Relationship Lending and Lines of Credit in Small Firm Finance , 1994 .

[131]  Jstor,et al.  Invention in the Industrial Research Laboratory , 1963, Journal of Political Economy.

[132]  A. Marcet,et al.  Centre De Referència En Economia Analítica Barcelona Economics Working Paper Series Working Paper Nº 172 Money and Prices in Models of Bounded Rationality in High Inflation Economies Money and Prices in Models of Bounded Rationality in High Inflation Economies * , 2022 .