paper_the impact of credit crunch on enterprise financing in emerging market: does firm size matter
DESCRIPTION
NES 20th Anniversary Conference, Dec 13-16, 2012 Article "The Impact of Credit Crunch on Enterprise Financing in Emerging Market: Does Firm Size Matter?" presented by Yulia Rodionova at the NES 20th Anniversary Conference. Authors: Julia Korosteleva, Natalia Isachenkova and Yulia RodionovaTRANSCRIPT
1
The Impact of Credit Crunch on Enterprise Financing in Emerging
Markets Does Firm Size Matter
Julia Korostelevaa Natalia Isachenkovab and Yulia Rodionovac
a Dr Julia Korosteleva Lecturer in Business Economics Department of Social Science School of Slavonic and East European Studies University College London 16 Taviton Street London WC1H 0BW UK tel + 44(0) 20 7679 7590 e-mail jkorostelevauclacuk (corresponding author)
b Dr Natalia Isachenkova Faculty of Business and Law Kingston University London Kingston
Hill Kingston upon Thames Surrey KT2 7LB United Kingdom tel +44(0) 20 8547 8206 Fax +44(0) 20 8547 7026 e-mail nisachenkovakingstonacuk
c Dr Yulia Rodionova Senior Lecturer in Finance Department of Accounting and Finance
Leicester Business School De Montfort University The Gateway Leicester LE1 9BH UK tel +44 (0) 11 6257 6098 e-mail yrodionovadmuacuk
This draft 30 January 2012
Abstract
Using panel data on 21867 firms from the 2002-2009 Business Environment and
Enterprise Performance Surveys (BEEPS) we examine how firm-level characteristics and
economy-wide institutional settings influence firmsrsquo perceptions of financial constraints and
their choices of investment finance The data enables a perspective on the effects of the
global financial crisis that in 2008 hit hard the emerging markets of Europe and Central Asia
Our analysis of relative percentages of types of investment finance used by the small and
medium-sized firms (SMEs) in the region vis-agrave-vis the financing mix of large firms points to
a greater flexibility of the SMEs in responding to a sharp credit supply shift smaller firms are
able to respond by increasing relative percentages of alternative financing sources such as
trade credit and external equity As evidenced by the BEEPS data in the midst of the global
credit crunch differences between small and large firms in the degree to which firms say
they are constrained are largely eliminated Tests confirm that it is switching to trade credit at
a time of crisis that can soften financing constraints In particular the relative percentage of
trade credit in the financing mix appears to pick up a significant difference in perceived
financing constraints across the size categories and positively affects the propensity of SMEs
to declare themselves as less financially constrained
Keywords financing constraints SMEsrsquo financing choices trade credit crisis
Acknowledgements We are enormously grateful to David Roodman for his invaluable
advice on the technical part of the project We also thank Mike Adams David Crowther John
Holland Stas Kolenikov Fred Mear Tomek Mickiewicz Ivan Shaliastovich Oleh Tsyvinski
and other participants at the BEROC 2010 International Economics Conference in Minsk
2
BAFA 2011 Conference at Aston Business School and BAFA North 2011 at University of
Salford for useful comments and suggestions The usual caveat applies Yulia Rodionova
gratefully acknowledges funding from the De Montfort University ECR Scheme
1 Introduction
Finance availability and cost have been cited as one of the major constraints for
small and medium-sized enterprises (Beck et al 2005 2006 2008) Given the small scale
of their projects and higher risk associated with the higher asymmetry in information arising
from small and medium-sized businessesrsquo (SMEs) lack of accounting records and credible
reputation financial institutions find it costly to monitor small businesses even if
technological progress particularly in part of the risk scoring techniques have enabled the
banking sector to handle the SMEsrsquo finance better than in the past (de la Torre et al 2008)
A large body of literature documents that financial constraints hinder SMEsrsquo growth
and development (Klapper et al 2002 Pissarides et al 2003 Beck et al 2005
Gorodnichenko and Schnitzer 2010) More specifically Gorodnichenko and Schnitzer
(2010) propose the theoretical model showing that financial constraints reduce the ability of
domestically owned firms to innovate and export with further adverse implications for
productivity growth in the economy Their empirical results based on the 2002-2005
Business Enterprise Environment and Performance Survey data conform to their theoretical
propositions implying that policymakers should focus on addressing the problem of financial
market frictions to enhance productivity at both micro and macro levels
Financial constraints may get particularly severe in the period of crisis with small and
medium-sized businesses expected to suffer disproportionally more than their larger
business counterparts given the overall financial contraction in the domestic economies (as
suggested by the financial accelerator theory of real business cycles) and the inability of
smaller-sized firms to draw upon the international financial markets The 2007-2009 global
credit crunch that severely affected international payments and trade credit hit hard across all
the transition countries especially the exports and production in Eastern Europe (Calderon
and Didier 2009 Didier et al 2011) In this paper we analyse the perceptions of financial
constraints of SMEs and the SMEsrsquo choice of investment finance for the transition economies
over the period of 2002-2009 focusing in particular on the effects of the crisis for SMEs
financing vis-agrave-vis large firms More specifically using the 2002-2009 Business Environment
and Enterprise Performance Survey (BEEPS) data of 21867 firms in Emerging Markets of
Europe and Central Asia we undertake a panel data study to investigate how various firm
characteristics and institutional settings affect firmsrsquo perceptions of financial constraints We
further analyse the implications of the 2007-2009 financial crisis for SMEsrsquo financing choices
3
Our study also links the BEEPS measure of financing constraints with relative changes in the
composition of investment finance In particular we examine whether an increase in the
relative percentage of alternative sources of finance such as trade credit has an impact on
the degree of financing constraints
More specifically we first look at the effect of our variables of interest on the firmsrsquo
perceptions of access to finance in a probit model We find that SMEs though more
financially constrained in general are less so during the crisis so that their perceptions of the
financial constraints do not significantly differ from those of larger firms We further
investigate their financing choices and our findings suggest that the reduction in the degree
of perceived financial constraints between small and large firms may be attributed to SMEs
being more flexible in the choice of the sources of financing such as trade credit and ownerrsquos
contribution This finding sheds new light on the role of SMEs vs large firms as channels of
propagating of monetary and real shocks during a recession
Our work is organised as follows Section Two discusses the peculiarities of firm
financing in transition economies with a specific focus on small businesses Section Three
discusses theoretical and empirical issues pertaining to the determinants of smaller
businessesrsquo financing including in the context of financial crisis Based on that we postulate
our hypotheses Section Four describes the data and the methodology Empirical results
follow in Section Five Finally Section Six presents conclusions and policy implications
2 The stylised facts about SME financing in Transition Economies
To launch and operate new ventures entrepreneurs require financial resources that can
either come from their own savings or are external borrowed in formal and informal financial
markets or raised through issuance of equity shares Empirical studies on SME financing
show that smaller businesses typically rely predominantly on their own equity and informal
finance (primarily family and friendsrsquo funds and investment of other individuals comprising
business angels) and exhibit a moderately low level of formal external financing (Bates
1997 Ravid and Spiegel 1997 Huyghebaert 2001 Bygrave 2003)
The situation with SME finance in transition economies is more complex given that
neither of these sources was widely available in the early stage of transition (Estrin and
Mickiewicz 2010) Although individuals were allowed to deposit their savings in the state
savings banks the accumulation of wealth was low Furthermore the savings that individuals
kept with the state savings bank were eroded by hyperinflation at the start of transition For
these reasons internal finance and funds from family and friends were relatively scarce at the
start of transition and were likely to play less prominent role than in non-transition countries
and in the period of crisis even more so given high sensibility of individualsrsquo savings to
external shocks
4
The required funding was also difficult to raise via bank borrowing given the
underdeveloped and inefficient financial system inherited from the planned economy where
the role of finance was passive for finance served as a monetary counterpart of planning
directives Despite the emergence of new private banks the competition in the banking
sector across the region remained low which can partly be explained by the capital
weakness of new banks making the market very segmented The dominance of state-owned
or (partly) privatised commercial banks made the banking environment very concentrated
with these banks expressing preference for large state-owned or privatised enterprises at the
cost of discouraging new entrants (Rostowski 1995 Berglof and Bolton 2002) A number of
newly established banks did not have enough experience in private sector lending
(Pissarides 1998) and in the situation of a great economic uncertainty preferred occupying
some niches to riskier lending to the real sector in particular to SMEs Such niches for
example included foreign currency transactions short-term lending on the inter-bank market
and operations with governmental securities (Korosteleva and Lawson 2010) Other new
banks so-called lsquopocket banksrsquo were mainly established by privatised larger enterprises to
serve the purpose of financing their own activities bringing to the surface the problem of
connected lending Given all these peculiarities of banksrsquo establishment at the start of
transition small de novo firms were severely restricted in their access to the formal credit
market The situation was aggravated further by the credit crunch that was a result of
macroeconomic stabilisation measures taken by transition governments to curb inflation
High nominal interest rates were a far larger problem for new ventures which typically face
an initial period of negative profitability1
The progress in reforming the financial sector was slow This is confirmed by the EBRD
annual transition indicators measuring the progress in reforms They include (1) the banking
reform and interest rate liberalisation and (2) the securities market and non-bank financial
institutions For those two the average scores for the region reached only 24 and 21
respectively on the scale from 1 (little progress) to 43 (developed market economies
standards) the decade after the transition began In 2009 only the Central and Eastern
European countries (CEECs) which joined the EU scored as high as 4 in both areas of
financial institutional reforms with Latvia Lithuania Slovakia Slovenia Bulgaria and
Romania still being one score down in the area of securities markets The latter three
countries also scored lower than their CEE counterparts in the area of banking sector reform
Some CIS countries such as Belarus Turkmenistan and Uzbekistan viewed as the laggards
in transition still have rankings as low as 1 (Turkmenistan) and 2 (Azerbaijan
1 Pissarides (1998) argues that SMEs often reinforce banksrsquo perceptions of them being unreliable borrowers given frequent under-reporting of profits due to tax avoidance purposes or failure to register ownership of assets prompting lenders to penalise SMEs by charging them higher premium
5
BelarusKyrgyzstan Tajikistan and Uzbekistan) in both areas of the financial institutional
reforms Overall after the years of the financial sector reform the majority of transition
economies still have rather shallow domestic credit systems (Figure 1) and relatively
underdeveloped capital markets with market capitalisation ratio varying from as low as 16
per cent of GDP in Kyrgyzstan and Armenia2 to as high as 40-50 per cent in Croatia amp
Kazakhstan respectively in 2009 with Montenegro and Russia standing out compared with
the rest of the region3
Figures 1 amp 2 to be inserted here
A number of empirical studies further confirm that financial constraints in transition
economies constitute one of the main obstacles for start-up entry and growth (Pissarides
1998 1999 2001 Pissarides et al 2003 Klapper et al 2002) Pissarides (2001) concludes
that lack of access to finance is more binding for SMEs than larger businesses with the
severity of this constraint being stronger in South-East Europe compared to other transition
economies including the Commonwealth of Independent States (CIS) In their study of SME
growth in Russia and Bulgaria Pissarides et al (2003) find that financial constraints hamper
SME growth and that SMEs resort to the use of internal funds to overcome constraints on
external finance This is similar to Johnsonrsquos et al (2002) findings suggesting that internal
finance can substitute for external finance (see also Lizal and Svejnar (2002) for similar
conclusions) Pissarides et al (2003) also show that financial constraints affect SMEs more
than barriers related to property rights issues Drawing on the data on 15 Eastern European
countries Klapper et al (2002) show that financial constraints affect SMEs longer-term ability
to grow Finally Gorodnichenko and Schnitzer (2010) show that financial constraints restrain
the ability of domestically-owned firms to innovate and export thus inhibiting productivity
growth They also argue that this negative effect is magnified due to financial constraints
forcing export and innovation activities to become substitutes whereas they are commonly
found to be complements
We complement these studies with the most recent empirical evidence on the
determinants of SMEsrsquo perception of financial constrains in transition economies which
comes from the 2002-09 BEEPS dataset The BEEPS self-reported measure of financing
constraints unites in one termed lsquoaccess to financersquo metric both quantity and price
constraints In the surveys firms were directly asked to indicate the extent to which access to
2 In fact it goes as low as 02 per cent of GDP in Uzbekistan in 2005 following the World Development Indicators data with no data reported for subsequent years 3 Montenegro and Russia emerge as outliers given their far higher ratios of market capitalisation These are 104 and 70 per cent respectively and they are far above of some West European countriesrsquo ratios including Germany and comparable to the ones in China and USA
6
finance was an obstacle to their operations and the averages for the individual countries in
the dataset are shown in Figure 3 With exception of Bosnia and Uzbekistan4 SMEs in all
transition economies are more financially constrained than larger firms although as our
empirical results show (see Section 5) the difference in perception of financial constraints
has been largely eliminated between smaller and larger firms during the recent global
financial crisis
Figure 3 to be inserted here
It has previously been argued that a low reliance on outside financing scarce use of
equity finance5 and low level of inter-firm trade financing is a common feature of small firms
across the transition region of Europe and Central Asia (Klapper et al 2002 Pissarides
1998 2001) Furthermore Klapperrsquos et al (2002) find almost no use of long-term debt
attributing this to the underdevelopment of the banking sector weak collateral law and poor
credit information registries Their evidence also shows virtually zero reliance of SMEs
across the 15 Eastern European countries on trade credit with the exception of Hungary and
to a lesser extent of the Czech Republic Poland and Romania They explain this by
insufficiency of partner firmsrsquo internal funds or their inability to access external borrowings to
become able to finance extension of trade credit Low reliance on trade credit may be also
attributed to low foreign presence in some countries of the region as multinationals could
extend trade credit to local firms including SMEs (Klapper et al2002)
Figure 4 shows the relative importance of financing sources used for purchase of fixed
assets by SMEs in the transition economies The data underlying this figure are the relative
percentages of the financing sources firms used in the year preceding a BEEPS survey year
in the BEEPS 2002-2009 surveys The surveys group financing sources into the following six
types internal funds or retained earnings ownersrsquo contribution or issued new equity shares
[funds] borrowed from private banks [funds] borrowed from state-owned banks purchases
on credit from suppliers and advances from customers and other (moneylenders friends
relatives non-banking financial institutions) Figure 4 suggests that SMEs in the transition
economies tend to largely rely on their internal funds or retained profits in funding their
investment Only about 23 per cent of small and medium-sized firms rely on borrowing from
private banks Trade credit and equity finance occupy similar shares in funding SMErsquos
investment decisions and account for the mere 9 per cent of total purchase of fixed assets
4 In Bosnia amp Uzbekistan larger firms are marginally more constrained than smaller ones (at 10 percent level of significance) 5 Small firms may also decide to limit their issuance of outside equity to avoid reduction in control of their firms (Scherr et al1990 and Hamilton and Fox 1998 cited in Klapper et al 2002)
7
According to Cull (2007) trade credit can be seen as substitute for loans for private firmsrsquo
trading partners that are shut out of financial credit market Other sources include borrowing
from informal money lenders and family and these emerge as the third important source of
funding SMEsrsquo investment after internal funds and bank credit We expect the informal
finance to be mostly comprised of equity provided by family and friends as funding obtained
from informal private money lenders was overly expensive with the premium standing at least
20 percentage points above that charged by local intermediaries (Pissarides 1998)
Figure 4 to be inserted here
In conclusion we note that the number of studies of the financing decisions of small
and medium-sized enterprises in emerging markets and in particular in the former centrally
planned economies or previously heavily regulated economies such as India has been rather
limited (see eg Nivorozhkin 2005 Delcoure 2007 Crnigoj 2007 Chakraborty 2008
Girma et al 2008 Li et al 2009 Correa et al 2010 Love and Zaidi 2010) We contribute to
this literature by analysing for SMEs in these countries the determinants of the following five
financing options retained earnings private loan (loan finance from private banks) trade
credit private equity (ownersrsquo equity) and informal finance In this study the phrase lsquoinformal
financersquo is an umbrella term that helps condense in one category funds from moneylenders
friends relatives non-banking financial institutions Our results allow us to shed more light
on whether and how the theories of financing choices apply to transition countries in the
credit crunch environment
The following section discusses theories pertaining to small firm financing and how this
may be affected by a financial crisis
3 Small Firm Financing and the Effect of Crisis Theoretical Considerations and
Hypotheses
31 Theoretical arguments
When analysing financing choices of SMEs we first turn to the two cornerstone
theories of explaining leverage the trade-off theory and the pecking order hypothesis (POH)
While the former states that firms may prefer debt to equity in the presence of corporate tax
subject to the costs of potential financial distress stemming from borrowing large amounts
(Modigliani and Miller 1958) the latter suggests that the firms first finance their investment
out of retained earnings as this is the cheapest and the most readily available alternative
then out of debt and lastly via issuing equity which is seen as the most expensive option to
8
the firm (Arnold 2008) More recent literature on firm financing started to look closer at and
emphasize the importance of other sources such as trade credit especially for the small and
medium firms using mostly the data on developed economies For instance Berger amp Udell
(1998) stress the importance of trade credit to the short-term financing of small firms Bevan
and Danbolt (2002) estimate that trade credit account for 62 per cent of total liabilities of UK
firms
The role of trade credit has been seen by some researchers as a substitute of bank
lending for liquidity-constrained firms (Cull 2007) such as SMEs One of the benefits of trade
credit compared to the bank lending is that it allows to partly get around the information
asymmetry problem between the lender and the borrowing SME as business partners would
have more information about the ability of the borrower to repay and about such reputation of
the borrower in the industry Meltzer (1960) Nielsen (2002) and Petersen and Rajan (1997)
argue that trade credit may also provide a means of alternative financing under the tight
monetary conditions such as credit crunches when financial institutions are less able or
willing to provide loans to SMEs In support of this hypothesis Atanasova and Wilson (2003
2004) and Mateut et al (2006) find that under tight monetary conditions firms tend to
substitute bank loans with trade credit However the findings in Bernanke and Gertler (1995)
and Gertler and Gilchrist (1993) do not agree with this hypothesis In line with these authors
Taketa and Udell (2007) using a sample of Japanese SMEs after the crisis years find that
bank lending and trade credit are complements rather than substitutes Love and Zaidi
(2010) report that the use of trade credit by East Asian firms has declined after the 1998
financial crisis together with the use of bank loans Finally interesting enough there is
some empirical evidence which suggests that in the context of transition economies there
may be a higher reliance of SMEs on trade credit in the period of crisis More specifically
focusing on the panel of 1686 firms in Bulgaria Hungary Latvia Lithuania Romania and
Turkey in 2007 and 2009 Klapper and Randall (2010) find that during periods of contractions
in bank credit buyers might depend more on trade credit (although primarily to be used for
short-term financing) that may be particularly true for small firms This provides some support
for the hypothesis that the two sources of finance namely bank loans and trade credit in the
context of transition and emerging economies can be seen as substitutes in period of crisis
Another source of firm financing that has recently received increased attention is
private equity Private equity consists of investments by private individual investors or firms
(business angels investments funds) as well as business ownersrsquo contributions to their
equity The lsquobusiness angelsrsquo type of private equity is currently on the rise in the developed
countries as well as emerging markets such as India Brazil China Malaysia However
ownersrsquo contribution is a far more widespread type of private equity in countries under
consideration Generally SMEs are prone to various types of business and financial risks
9
and it would be very important for them to try and hedge against these risks Zou and Adams
(2008) look at the effect of property insurance on the public firmsrsquo borrowing capacity in
China while Matthews and Scott (1995) in the US and Herbane (2011) in the UK investigate
the types of risk management used by the SMEs The findings point to a rather limited use by
the small and medium-sized enterprises of the risk management assessment and hedging
techniques
In the emerging markets of the post-Soviet bloc the use of risk management techniques
such as hedging with financial derivatives is virtually non-existent However an informal risk
management practice of accumulating cash out of profits and also of using informal lending
from family and friends to serve as a cushion in the times of financial distress as protection
against possible bankruptcy and as an instrument of insurance against risks has been one
way of accounting for the risky nature of SMEs in these countries Secondly many SMEs
sometimes use bankruptcy when they find themselves in the situation of financial distress
and then open a new firm without losing much of their personal assets (Radygin et al 2005)
These SMEs are oftentimes are registered as belonging to a relative or the SMEs could be
registered as founded by an artificially created third party with no links to the actual ownerrsquos
personal assets Recently banks in the new emerging economies such as Russia started a
practice of compulsory purchase of loan insurance if the SME is to take a loan from the bank
This serves as a risk insurance mechanism to a certain extent at the same time however
increasing the cost of bank financing However more recently this practice has attracted the
attention of the Federal Antimonopoly Service that ruled that there is evidence of collusion
between banks and insurance companies Overall we could conclude that the use of risk
management practices is very narrow and of a rather informal nature
The next sub-section explores in greater detail the institutional context of financing in the
situation of economic crisis
Empirical studies on small firm financing in the years of crisis are primarily motivated by
the informational asymmetries theories One of the most important contributions in the study
of the role of SMEs during business cycle has been the real business cycle (RBC) theory
(Bernanke and Gertler 1995 Bernanke Gertler amp Gilchrist 1998) The argument put forward
by the RBC theory is that SMEs face tighter liquidity constraints in terms of external financing
due to higher informational asymmetries associated with their activities the low value of
their assets to serve as collateral the high cost of monitoring small businesses given a small
scale of their investment projects and subsequently the unwillingness of banks to lend to
SMEs
During economic slowdowns when small businesses are even more in need of external
finance bank lending to them diminishes even further which tends to propagate the crisis if
the SMEs then go out of business (see for example Tornell and Westermann 2005) At the
10
same time as larger firms use more finance and tend to rely more on external funding they
may be hit harder by financial contraction in the situation of global crises when international
financial markets dry up so preventing larger firms from drawing upon them when required
They are also less flexible and it is more costly for them to restructure and downsize when
they are hit with external shocks Furthermore while SMEs tend to be more flexible in relying
on other sources of finance including trade credit contributed equity and informal finance
the financial structure of larger firms generally tends to be less diversified with a preference
often given to retained profits and bank finance following the pecking order theory Taken
together we may argue that both supply and demand for finance is more affected for larger
firms in the situation of external shocks
Based on the discussion presented in Sections 2 and 31 we further discuss three main
groups of factors which are likely to affect firmsrsquo perception of financial constraints and their
financing choice strategy These are as follows (1) firm size in general and in the period of
crisis (2) other firm- and industry-specific characteristics including foreign ownership export
orientation firmsrsquo social capital and the degree of competition and its pressure on the firm to
develop a new product and (3) country-level institutional parameters including the degree of
protection of property rights and the development of the financial sector
32 Size of the enterprise and the effect of crisis
With regards to the effect of firm size based on the general discussion in the literature
(see sections 2-31) we expect SMEs to be more financially constrained in their access to
external lending and respectively more reliant on internal funds This is due to insufficient
information that the bank can obtain about a particular SME as well as due to a potentially
lower size of collateral However this lower reliance of SMEs on external debt can potentially
be a source of flexibility during the crisis when formal financial markets dry up and when
even large well-established firms have difficulty obtaining bank credit Furthermore following
Atanasova and Wilson (2003 2004) Mateut et al (2006) and Klapper and Randall (2010) we
expect that under tight monetary conditions SMEs in transition economies are more likely to
switch to alternative forms of financing such as trade credit We also hypothesize that SMEs
are more likely to rely on ownersrsquo contributed equity which they tend to accumulate in good
times as part of their risk management strategy to use it as a cushion in the times of financial
distress In summary we expect the difference between the SMEs and large firms in their
reliance on bank finance to diminish during the crisis years and second SMEs to be more
flexible and rely more on other sources of finance such as trade credit and private equity in
the period of financial contractions
11
33 Firm- and industry- level factors
As far as the firm-level and industry-level variables are concerned we expect the
following results first the level of social capital of a firm as proxied by the inverse of the time
spent dealing with government regulations to indicate possible established connections with
public officials can positively affect its access to trade credit Next the industry-level
pressure on a firm from competitors to develop a new product may increase the firmrsquos
chances of obtaining a bank loan as the bank may perceive the firmrsquos operations as more
diversified and less risky (Isachenkova et al 2011) We also expect foreign competition and
the pressure it exerts on a firm innovation capability to play less important role for firm
financing decisions as SMEs are more likely to operate in market niches and they are
unlikely to compete with multinational enterprises In contrast we expect a pressure
originated from customers on a firm to innovate to increase a firmrsquos probability to rely more
on external sources of funding This may be attributed to the fact that a firm does not only
differentiate itself from other firms further with developing a new product but also assures a
demand for this product by responding to the needs of its existing customers The
guaranteed demand for a new product would be one of the most crucial factors taken into
account by bank managers or potential investors in decision-making concerning project
financing Thirdly international product certification may play a similar role with regards to
bank loans increasing the access to external funds Fourth we investigate the effect on the
choice of financing of the firm age with a square term Generally older firms may have
easier access to bank loans as more information is available about them to the lender (Beck
et al 2006 Canton et al 2010) however due to the particulars of the transition period
sometimes older firms may be less economically viable and unable to get a loan therefore
the sign of this coefficient is uncertain here Lastly we also look at the firmrsquos export
orientation which is expected to increase the reliance on bank lending and its ownership
type where we single out foreign and domestic private firms In the case of foreign firms
they are less likely to use private loans and rely instead on retained earnings and intra-
company funds transfers in the case of MNCs
34 Institutional environment
The impact of institutional variables on the financing choices of firms has been of the
utmost interest to economists and policy-makers during the period of transition (see for
example Stijn and Tzioumis 2006 Mitra et al 2008 see also Commander and Svejnar
(2009) for an in-depth and comprehensive analysis of the impact of various business
environment factors on firm performance using BEEPS 2002 - 2005 panel) In our analysis
12
we concentrate on two institutional factors the degree of protection of property rights and the
size of the formal financial sector which have been claimed to be of key importance for firmsrsquo
financing decisions (see Korosteleva and Mickiewicz (2011) for overview of the related
literature) As far as the property rights protection is concerned it is found to play crucial role
for firm growth and access to external finance (Aidis et al 2008 2010 Korosteleva and
Mickiewicz 2011 Estrin Korosteleva and Mickiewicz 2011) In the environment with weak
protection of property rights financial contracts are less likely to be concluded leading to the
underdevelopment of finance and credit rationing with small firms to be disproportionally
affected the most (Acemoglu and Johnson 2005) Beck et al (2004) show that in terms of
access to external finance small firms benefit disproportionally from higher levels of property
rights protection Lack of secure property rights may also discourage SMEs from taking full
advantage of opportunities to invest (Johnson et al 2002) In a survey of private small
manufacturing firms in Poland Russia Ukraine Romania and Slovakia Johnson et al
(2002) find that small firms tend to reinvest less of their earnings when they perceive their
property rights insecure They also find that the effect of the property rights system is of more
paramount importance for entrepreneursrsquo decisions to reinvest their earnings than availability
of formal finance Moreover if property rights are well-protected this lessens the extent of
potential threat of being expropriated by raidersbank lenders in an artificial bankruptcy
procedure which has been quite a significant issue for firms in Russia and other FSU states
(Radygin et al 2005 Sprenger 2002) Based on this we expect that strong property rights
are likely to encourage SMEs to use more debt as well as to use their own funds and
retained profits for investing in investment projects
With regards to the size of the formal finance as measured by the share of private
credit to GDP the relationship between financial depth and financial constraints has been
extensively studied (Beck et al 2006 also see for example Love 2003 who employing a
sample of 36 countries finds that financial development affects firmsrsquo investment by
increasing the availability of external finance) Financial intermediaries facilitate the risk
amelioration in the presence of problems created by information and transaction frictions by
developing expertise in risk assessment and in monitoring (Levine 1997 Barth et al 2006
Barth et al 2008) Developed financial institutions are found to be particularly beneficial for
small firms compared to large ones (Barth et al 2006 Beck et al 2005 2006 2008)
Pissarides et al (2003) show that financial constraints affect SMEs even more than
deficiency of the property rights protection Accordingly the size of the formal financial
system is expected to be positively related to the use of bank finance as a better functioning
financial system should help ease up borrowing constraints
4 Data and Methodology
13
41 Sample
To explore the determinants of the financial structure of small businesses we use the
2002-2009 Business Environment and Enterprise Performance Survey (BEEPS) data6 of
21867 firms covering 26 transition economies of Europe and Central Asia (ECA)7
The sample is primarily comprised of small and medium-sized businesses8 which
account for 893 per cent of the sample The sample is representative in terms of industrial
coverage with the majority of SMEs of the sample operating in manufacturing wholesale
and retailing industries
BEEPS dataset provides rich information on firm characteristics investment
behaviour and firmsrsquo perception of business environment including financial constraints
which are of a primary interest for our investigation of the effect of the recent financial crisis
on firmsrsquo perception of financial constraints Potentially we could use other micro-level data
characterising various domains of business environment captured by firmsrsquo perceptions for
investigating the effects of the institutional settings However using these micro-level
indicators as explanatory variables would make our study plagued with a problem of
endogeneity To avoid this we merge our firm-level data with country-level indicators
characterising various institutional domains The country level data were obtained from the
World Development Indicators (World Bank) and Polity IV databases (for further discussion
see below) Finally the BEEPs dataset contains other useful information which allows us to
shed light of the effect of for example social capital as proxied by the indirect measure of
possible connections with the authorities (see below for the definition of the variable) on firm
financing
42 Variable Definition and Measurement
Explanatory variables
6 This data is a joint project of the European Bank for Reconstruction and Development and World Bank The first survey was launched in 1999 The dataset used in the present study is an unbalanced panel covering the years of 2002 2005 2007-2009 7 The sample includes the following countries Albania Armenia Azerbaijan Belarus Bosnia Bulgaria Croatia Czech Republic Estonia FYROM Georgia Hungary Kazakhstan Kyrgyzstan Latvia Lithuania Moldova Montenegro Poland Romania Russia Serbia Slovakia Slovenia Tajikistan and Ukraine We exclude Uzbekistan as an outlier from our sample We also exclude Turkey as it is not classified as a post-communist country undertaking transition from a planned to a market economy 8 We utilize the EU employment criterion to define small and medium-sized businesses More specifically businesses are defined as micro if they employ 9 and less employees small ndash between 10 and 49 medium ndash between 50 and 249 and large ndash over 250 employees Respectively SMEs are defined as firms employing less than 249 firms
14
To test our main hypothesis of the effect of a firm size on firmsrsquo perception of financial
constraints we introduce a dummy variable denoting small and medium-sized business
coded as 1 if firms are classified as small or medium-sized businesses according to the EU
definition based on the employment criterion For robustness of our results we also use a
continuous variable denoting a size of employment as measured by the natural logarithm of
employment9 The obtained results are consistent with the ones using the SME indicators
To capture the effect of the recent financial crisis we introduce a crisis dummy coded
as 1 if the year of survey is equal to 2008 or 200910
We also introduce a number of firm-level controls which include age of firm11 type of
ownership including private and foreign ownership export orientation and whether a firm
has an internationally certified product all equal to 1 if a business has a respectively listed
characteristic and zero otherwise We also examine the effect of various sources of pressure
on firms to innovate ndash the indicators which are considered to be important for firm investment
decisions Respectively the pressure for innovation may stem from domestic competition
foreign competition and customers To capture the effect of a firmrsquos social capital we
introduce an indicator which indirectly may capture some possible connections of a firm with
authorities It is proxied by time spent by each firm on dealing with government regulations
We assume the less time firms spend dealing with government regulations the more likely
they have some established connections with public officials which allow them to avoid
burdensome regulation procedures
In our study we also introduce a number of country-level variables which characterize
the institutional environment in the countries covered by our sample More specifically we
include an indicator of the financial development as measured by the ratio of domestic credit
to private sector to GDP (one year lag to avoid potential endogeneity) obtained from the
World Bank World Development Indicators (World Bank 2011) This measure has been used
in previous studies (Klapper et al 2006) and it is expected to be of a primary importance for
transition economies where firms tend to rely more on bank finance rather than capital
markets We also introduce a measure of property rights protection (a one year lag) proxied
by the indicator of effective constraints imposed on the executive branch of the government
and obtained from Polity IV project12 This measure of property rights protection is
9 These results are not reported here to save some space However they can be obtained from authors upon request 10 Here it is important to note that although the financial crisis has started in 2007 in the USA it spread to transition economies in 2008-2009 11 Some studies find a non-monotonic relationship between age and firm decision-making In this study we introduce a squared term of age along with a age variable to capture this possible non-linearity 12 Available from httpwwwsystemicpeaceorgpolitypolity4htm
15
considered to be superior to other indicators including the index of property rights reported
by the Heritage Foundation ndashWall Street Journal (for further discussion see Acemoglu and
Johnson 2005 Glaeser et al 2004 Estrin Korosteleva and Mickieiwcz 2011)
In the present study we also introduce macroeconomic controls including cyclical
economic performance as measured by the one year lag of the GDP annual growth rate
and the level of economic development as proxied by a set of GDP pc dummies denoting
the five quintiles of its distribution to address the problem of potential multicollinearity with the
measure of financial development
Finally we include industry and country controls in all our specifications Introducing
country dummies into analysis allows to control for cross-country heterogeneity
For further definition of all variables their descriptive statistics and correlation matrix
see Tables 1-2
43 Dependent variables
To investigate the effect of a firmrsquos size on its perception of financial constraints we
construct a dummy variable coded as 1 capturing a major and very severe obstacle for
access to finance and 0 otherwise
The firm financing choices are defined by the five individual dependent variables
associated with tobit financial choice equations in the seemingly unrelated regression
equations model
One important thing to mention here is the inability to distinguish between
owninternal funds and external private equity considered as one of the limitations of the
2002-2009 BEEPS dataset In the period under investigation BEEPS offers two questions
which aim to capture the use of equity The first one centres around retained earnings and
the second one shows ownersrsquo contributions and private equity or issued new equity
Following some theoretical considerations discussed in sections 2 and 3 in the context of
SMEs we expect the second element of equity to be primarily comprised of existing ownersrsquo
new contributions rather than private equity
Thus the indicator of financial choices represents a set of five individual dependent
variables including retained earnings contributed earnings private borrowing informal
finance trade credit with each of them constructed as a share in total financing of SMErsquos
investment decisions (see Table 1)
44 Methods
16
In this study we employ a number of estimators to obtain robust results More
specifically we use a probit model to investigate the effect of a firm size and the recent
financial crisis on firmsrsquo perception of financial constraints The effect of a firm size in the
situation of crisis is captured by the introduction of the interaction term between firm size as
proxied by the SME indicator and a financial crisis dummy
We further employ the seemingly unrelated regression equations model combined
with the tobit approach for studying firmsrsquo financial structure
Probit model of perception of financial constraints
In the probit model the probability of a firmrsquos perception of financial constraints as
major(j = 1) can be written as follows
( ) ( )int ++
++
infinminus
minus===
ijitj uXjitiitit ijitjuXjy uX
βα βαππ 212-
)()(2 21exp|Pr
Where ity is our measure of financial constraints as perceived by firms and itX is a
set of our explanatory variables discussed in detail in sections 3-4 Here it is important to
note that the interaction term in a probit model cannot be interpreted in a similar way as in
linear models and disregarding this may lead to misleading estimates of the interaction
effect which is of crucial importance for our study (Norton Wang and Ai 2004) Respectively
for robustness of our results here we follow the framework suggested by Norton Wang and
Ai (2004) to account for the model nonlinearity The adjusted marginal effects for the
interaction term are reported in the note to Table 313
Simultaneous Model of Financing Choices
As mentioned above we next model the choice of all five financing choices explicitly
We also hypothesise (following Isachenkova et al 2011) that firm financing choices are likely
to be determined jointly A standard way of modelling jointly determined indicators is a
system of equations - SURE ndash seemingly unrelated regression equations where equations
are linked only by their errors (Zellner 1962) We therefore model the five types of sources of
finance (internal funds private bank borrowing informal finance trade credit and private
13 We also run a probit regression for a split sample of (1) SMEs and (2) large firms to check the robustness of our results (based on the interaction term) while addressing a problem of multicollinearity between a crisis variable and its interaction term with a SME variable The correlation coefficient between a crisis variable and its interaction term with a SME variable is equal to 93 This can be attributed by the problem of a sample being overrepresented by SMEs which constitute 90 of all surveyed firms The results remain robust and can be available from authors upon request
17
equity) using a SURE framework within which we specify a set of five tobit regressions with
correlated residuals
We employ the STATA cmp module which allows to it Seemingly Unrelated Regressions
using the simulated likelihood method such as the Geweke Hajivassiliou and Keane (GHK)
algorithm (for further discussion see Roodman 2008) We utilise a tobit equation to model
each individual financial choice of firms because our dependent financing choices variables
are continuous but their range is constrained (censored) with a substantial number of
observations either equal to zero denoting those who do not use the respective source of
finance or to 100 showing the opposite Other observations are positive and may produce
many different outcomes (Verbeek 2000) Each tobit equation uses a set of identical
explanatory variables that proxy factors which could possibly be associated with firmrsquos
financing choices including industry and country dummies
We also considered the bias caused by potential interdependence between the choice of
whether to invest and firmrsquos financing choices We accounted for the potential selection bias
by introducing into the financial choices SURE Tobit equations (second stage outcome
equations14) the inverse Millrsquos ratio calculated based on modelling the choice to invest in
fixed assets (first stage or selection equation) To identify the first stage of the Heckman
selection model we chose a variable which is correlated with the first stage dependent
variable (investment decision) but not with the second ones (financing choices) We used the
rate of capacity utilization as part of our identification strategy Capacity utilization shows the
percentage of capital stock in use the higher is the rate the more likely firms will increase
investment Batyaeva and Aukutsionek (2001) show that the rate of capacity utilization is
higher in the group of investing firms than in the group of non-investing firms in Russia15 We
calculated the inverse Millrsquos ratio based on the above selection equation16 and included it as
a control in the second stage SURE Tobit equations The inverse Millrsquos ratio has only proved
to be statistically significant in the private bank loan equation pointing to the potential
selection bias arising from the possibility that the factors determining the decision to invest
might differ from those determining the use of bank financing in purchasing fixed assets
14 We also attempted to estimate an investment equation jointly with Tobit financial choices equations within the SURE framework using However given the overall complexity of the model we failed to do this We proceeded further with a two-stage approach by estimating an investment probit equation and calculating the inverse Millrsquos ratio that we add into the outcome financial choices equations at the second stage of the analysis to test for the selection bias 15 We performed an independent sample t-test to check whether the rate of capacity utilization is statistically significantly higher for investing firms compared to non-investing firms for our sample The null hypothesis of no difference was rejected at 1 level of significance 16 To economize on space we do not report the results of the investment probit equation but they are available from authorsrsquo upon request
18
Finally In Table 6 we attempt to condition the determinants of financing constraints
declared by SMEs on the relative percentage increase of trade credit in total funds used for
real investment As mentioned above in Section 2 the timings of measuring the composition
of financing sources precede by a year the timings of measuring the perceptions of financing
constraints That feature of the BEEPSrsquo design allays a likely concern about the endogeneity
of the relative proportion of trade credit and enables causal inference We too report in thre
note to Table 4 the adjusted marginal effects for the interaction term of the SME dummy with
the trade credit variable
In the next section we discuss our empirical results
5 Empirical Results
Table 3 reports the results of the probit model with the marginal effects for firmsrsquo
perception of financial constraints while Tables 4-5 summarize the results of SURE tobits for
a more detailed breakdown of five financing choices More specifically Table 4 reports the
results based on the whole sample to give a comparative perspective on SMErsquos financing
strategy vis-a-vis large businesses whereas Table 5 reports the results based on a
subsample of small and medium-sized firms to shed some light on their financing choices in
the period of crisis
Perception of financial constraints
Table 3 shows that generally small and medium-sized enterprises feel more financially
constrained with the coefficient for SME dummy in relation to the large firms being positive
and significant which is consistent with our discussion in sections 2-3 However the
coefficient of the interaction term with the Crisis dummy turns out to be negative and
significant in relation to the perception of financial constraints as a major obstacle and it
tends to outweigh the effect of a SME dummy when we calculate marginal effects The effect
of the interaction terms with the crisis remains robust after we adjust for non-linearity using
the framework proposed by Norton Wang and Ai (2004)17 Overall these results confirm
that small and medium-sized enterprises are much less financially constrained during the
crisis years with their perceptions close to those of the large firms This result is a polar
opposite to that obtained for the SMEs in the UK (Fraser 2009) which finds that not only do
SMEs generally feel more financially constrained but they report to be even more so during
17 We also check the robustness of our results to the potential problem of multicollinearity between a crisis dummy and its interaction term with SME by splitting a sample and testing the same specification separately for SMEs and large firms We also perform another robustness check by breaking a SME dummy into three subsequent dummies namely micro- small- and medium-sized firms The difference in perception of financial constraints gets almost eliminated in the case of small firms and is largely reduced in the case of micro firms whereas it is less so for medium-sized firms
19
the last crisis We could explain this striking difference by the peculiarities of the SMEs
functioning in new emerging economies The lower reliance of SMEs on external debt in
good times (as shown by results which are discussed below) gives SMEs some flexibility
during the crisis when formal financial markets dry up Jointly with overall flexibility to make
necessary cost cuts and to restructure a business this overall lower reliance on external
funding and the use of alternative sources of financing makes SMEs feel less financially
constrained under the crisis as compared to larger firms
We also find that a more developed financial sector as proxied by domestic private
credit as proportion of GDP helps ease up financial constraints This is in line with the
general literature suggesting that better functioning financial intermediaries facilitate the risk
amelioration in the presence of problems created by market frictions (Levine 1997 Barth et
al 2006 Barth et al 2008)
Unfortunately we fail to find any significant effect of the property rights protection on
firmsrsquo perception of financial constraints that may be explained by the fact that the effect of a
more developed financial sector is likely to outweigh the effect of the property rights
protection
Finally we also find that foreign ownership and international product certificate may
reduce firmsrsquo borrowing constraints while any pressure from domestic or foreign competition
so is pressure from the customers to innovate will increase firmrsquos perception of financial
constraints as major given that firms envisage the need to secure external funding for RampD
or any other innovation-related activities
Financing choices for investment in fixed assets
The results in Table 4 indicate that small enterprises tend to rely more on internal funds
and less on bank loans but they are no different from larger firms in respect of using informal
funds trade credit or private equity which is generally consistent with our discussion in
Sections 2 and 3 The results of Table 5 suggest however that under crisis small and
medium-sized firms tend to switch to other sources of finance such as trade credit and
ownerrsquos contributed equity and to respectively reduce the reliance on retained earnings
perhaps because they decrease due to the negative impact of crisis internal funds With
regards to our discussion of SMEsrsquo risk management we note that the use of private equity
(ownerrsquos contribution) during the crisis years increases which could indicate that the ownerrsquos
funds are used as a cushion in the period of financial distress
An interesting insight regarding the use of trade credit emerges for SMEs in our
sample although in non-crisis years small and medium-sized businesses are not significantly
different from larger firms in terms of reliance on trade credit SMEs tend to finance a
significantly higher proportion of their fixed asset investment by trade credit than large firms
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Evidence from Small and Medium Size Enterprises in Russia and Bulgaria Journal of
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Simachiov N A Shmeleva and R M Entov 2005 The institution of Bankruptcy
Development Problems Areas of Reforming Consortium for Economic Policy Research and
Advice Moscow 2005
Ravid S and M Spiegel 1997 Optimal Financing Contracts for a Start-up with Unlimited
Operating Discretion Journal of Financial and Quantitative Analysis 32 269-86
Rostowski J ed 1995 Banking reform in Central Europe and the Soviet Union Budapest
Central University Press
Rehman Shafiq 2011 The Effect of Financial Crisis on the Behaviour of Trade Credit A
Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
Roodman D 2009 Estimating Fully Observed Recursive Mixed-Process Models with cmp CGD Working Paper 168 Washington DC Center for Global Development Sprenger C 2002 ldquoOwnership and Corporate Governance in Russian Industry a Surveyrdquo
EBRD Working Paper No70
Stijn Claessens and Konstantinos Tzioumis 2006 Measuring firmsrsquo access to finance
World Bank Working Paper
Taketa G and K Udell 2007 Lending Channels and Financial Shocks The Case of Small
and Medium-Sized Enterprise Trade Credit and the Japanese Banking Crisis Monetary and
Economic Studies Institute for Monetary and Economic Studies Bank of Japan 25(2) 1- 44
November
Tornell A and F Westermann 2005 Boom-Bust Cycles and Financial Liberalization
Cambridge MA MIT Press
Verbeek M (2000) A Guide to Modern Econometrics John Wiley amp Sons New York
28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
Challenging Environments Journal of Small Business Management 49(1) 107-125
World Bank (2011) World Development Indicators (edition September 2011) ESDS
International University of Manchester DOI httpdxdoiorg105257wbwdi2011-09
Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
2
BAFA 2011 Conference at Aston Business School and BAFA North 2011 at University of
Salford for useful comments and suggestions The usual caveat applies Yulia Rodionova
gratefully acknowledges funding from the De Montfort University ECR Scheme
1 Introduction
Finance availability and cost have been cited as one of the major constraints for
small and medium-sized enterprises (Beck et al 2005 2006 2008) Given the small scale
of their projects and higher risk associated with the higher asymmetry in information arising
from small and medium-sized businessesrsquo (SMEs) lack of accounting records and credible
reputation financial institutions find it costly to monitor small businesses even if
technological progress particularly in part of the risk scoring techniques have enabled the
banking sector to handle the SMEsrsquo finance better than in the past (de la Torre et al 2008)
A large body of literature documents that financial constraints hinder SMEsrsquo growth
and development (Klapper et al 2002 Pissarides et al 2003 Beck et al 2005
Gorodnichenko and Schnitzer 2010) More specifically Gorodnichenko and Schnitzer
(2010) propose the theoretical model showing that financial constraints reduce the ability of
domestically owned firms to innovate and export with further adverse implications for
productivity growth in the economy Their empirical results based on the 2002-2005
Business Enterprise Environment and Performance Survey data conform to their theoretical
propositions implying that policymakers should focus on addressing the problem of financial
market frictions to enhance productivity at both micro and macro levels
Financial constraints may get particularly severe in the period of crisis with small and
medium-sized businesses expected to suffer disproportionally more than their larger
business counterparts given the overall financial contraction in the domestic economies (as
suggested by the financial accelerator theory of real business cycles) and the inability of
smaller-sized firms to draw upon the international financial markets The 2007-2009 global
credit crunch that severely affected international payments and trade credit hit hard across all
the transition countries especially the exports and production in Eastern Europe (Calderon
and Didier 2009 Didier et al 2011) In this paper we analyse the perceptions of financial
constraints of SMEs and the SMEsrsquo choice of investment finance for the transition economies
over the period of 2002-2009 focusing in particular on the effects of the crisis for SMEs
financing vis-agrave-vis large firms More specifically using the 2002-2009 Business Environment
and Enterprise Performance Survey (BEEPS) data of 21867 firms in Emerging Markets of
Europe and Central Asia we undertake a panel data study to investigate how various firm
characteristics and institutional settings affect firmsrsquo perceptions of financial constraints We
further analyse the implications of the 2007-2009 financial crisis for SMEsrsquo financing choices
3
Our study also links the BEEPS measure of financing constraints with relative changes in the
composition of investment finance In particular we examine whether an increase in the
relative percentage of alternative sources of finance such as trade credit has an impact on
the degree of financing constraints
More specifically we first look at the effect of our variables of interest on the firmsrsquo
perceptions of access to finance in a probit model We find that SMEs though more
financially constrained in general are less so during the crisis so that their perceptions of the
financial constraints do not significantly differ from those of larger firms We further
investigate their financing choices and our findings suggest that the reduction in the degree
of perceived financial constraints between small and large firms may be attributed to SMEs
being more flexible in the choice of the sources of financing such as trade credit and ownerrsquos
contribution This finding sheds new light on the role of SMEs vs large firms as channels of
propagating of monetary and real shocks during a recession
Our work is organised as follows Section Two discusses the peculiarities of firm
financing in transition economies with a specific focus on small businesses Section Three
discusses theoretical and empirical issues pertaining to the determinants of smaller
businessesrsquo financing including in the context of financial crisis Based on that we postulate
our hypotheses Section Four describes the data and the methodology Empirical results
follow in Section Five Finally Section Six presents conclusions and policy implications
2 The stylised facts about SME financing in Transition Economies
To launch and operate new ventures entrepreneurs require financial resources that can
either come from their own savings or are external borrowed in formal and informal financial
markets or raised through issuance of equity shares Empirical studies on SME financing
show that smaller businesses typically rely predominantly on their own equity and informal
finance (primarily family and friendsrsquo funds and investment of other individuals comprising
business angels) and exhibit a moderately low level of formal external financing (Bates
1997 Ravid and Spiegel 1997 Huyghebaert 2001 Bygrave 2003)
The situation with SME finance in transition economies is more complex given that
neither of these sources was widely available in the early stage of transition (Estrin and
Mickiewicz 2010) Although individuals were allowed to deposit their savings in the state
savings banks the accumulation of wealth was low Furthermore the savings that individuals
kept with the state savings bank were eroded by hyperinflation at the start of transition For
these reasons internal finance and funds from family and friends were relatively scarce at the
start of transition and were likely to play less prominent role than in non-transition countries
and in the period of crisis even more so given high sensibility of individualsrsquo savings to
external shocks
4
The required funding was also difficult to raise via bank borrowing given the
underdeveloped and inefficient financial system inherited from the planned economy where
the role of finance was passive for finance served as a monetary counterpart of planning
directives Despite the emergence of new private banks the competition in the banking
sector across the region remained low which can partly be explained by the capital
weakness of new banks making the market very segmented The dominance of state-owned
or (partly) privatised commercial banks made the banking environment very concentrated
with these banks expressing preference for large state-owned or privatised enterprises at the
cost of discouraging new entrants (Rostowski 1995 Berglof and Bolton 2002) A number of
newly established banks did not have enough experience in private sector lending
(Pissarides 1998) and in the situation of a great economic uncertainty preferred occupying
some niches to riskier lending to the real sector in particular to SMEs Such niches for
example included foreign currency transactions short-term lending on the inter-bank market
and operations with governmental securities (Korosteleva and Lawson 2010) Other new
banks so-called lsquopocket banksrsquo were mainly established by privatised larger enterprises to
serve the purpose of financing their own activities bringing to the surface the problem of
connected lending Given all these peculiarities of banksrsquo establishment at the start of
transition small de novo firms were severely restricted in their access to the formal credit
market The situation was aggravated further by the credit crunch that was a result of
macroeconomic stabilisation measures taken by transition governments to curb inflation
High nominal interest rates were a far larger problem for new ventures which typically face
an initial period of negative profitability1
The progress in reforming the financial sector was slow This is confirmed by the EBRD
annual transition indicators measuring the progress in reforms They include (1) the banking
reform and interest rate liberalisation and (2) the securities market and non-bank financial
institutions For those two the average scores for the region reached only 24 and 21
respectively on the scale from 1 (little progress) to 43 (developed market economies
standards) the decade after the transition began In 2009 only the Central and Eastern
European countries (CEECs) which joined the EU scored as high as 4 in both areas of
financial institutional reforms with Latvia Lithuania Slovakia Slovenia Bulgaria and
Romania still being one score down in the area of securities markets The latter three
countries also scored lower than their CEE counterparts in the area of banking sector reform
Some CIS countries such as Belarus Turkmenistan and Uzbekistan viewed as the laggards
in transition still have rankings as low as 1 (Turkmenistan) and 2 (Azerbaijan
1 Pissarides (1998) argues that SMEs often reinforce banksrsquo perceptions of them being unreliable borrowers given frequent under-reporting of profits due to tax avoidance purposes or failure to register ownership of assets prompting lenders to penalise SMEs by charging them higher premium
5
BelarusKyrgyzstan Tajikistan and Uzbekistan) in both areas of the financial institutional
reforms Overall after the years of the financial sector reform the majority of transition
economies still have rather shallow domestic credit systems (Figure 1) and relatively
underdeveloped capital markets with market capitalisation ratio varying from as low as 16
per cent of GDP in Kyrgyzstan and Armenia2 to as high as 40-50 per cent in Croatia amp
Kazakhstan respectively in 2009 with Montenegro and Russia standing out compared with
the rest of the region3
Figures 1 amp 2 to be inserted here
A number of empirical studies further confirm that financial constraints in transition
economies constitute one of the main obstacles for start-up entry and growth (Pissarides
1998 1999 2001 Pissarides et al 2003 Klapper et al 2002) Pissarides (2001) concludes
that lack of access to finance is more binding for SMEs than larger businesses with the
severity of this constraint being stronger in South-East Europe compared to other transition
economies including the Commonwealth of Independent States (CIS) In their study of SME
growth in Russia and Bulgaria Pissarides et al (2003) find that financial constraints hamper
SME growth and that SMEs resort to the use of internal funds to overcome constraints on
external finance This is similar to Johnsonrsquos et al (2002) findings suggesting that internal
finance can substitute for external finance (see also Lizal and Svejnar (2002) for similar
conclusions) Pissarides et al (2003) also show that financial constraints affect SMEs more
than barriers related to property rights issues Drawing on the data on 15 Eastern European
countries Klapper et al (2002) show that financial constraints affect SMEs longer-term ability
to grow Finally Gorodnichenko and Schnitzer (2010) show that financial constraints restrain
the ability of domestically-owned firms to innovate and export thus inhibiting productivity
growth They also argue that this negative effect is magnified due to financial constraints
forcing export and innovation activities to become substitutes whereas they are commonly
found to be complements
We complement these studies with the most recent empirical evidence on the
determinants of SMEsrsquo perception of financial constrains in transition economies which
comes from the 2002-09 BEEPS dataset The BEEPS self-reported measure of financing
constraints unites in one termed lsquoaccess to financersquo metric both quantity and price
constraints In the surveys firms were directly asked to indicate the extent to which access to
2 In fact it goes as low as 02 per cent of GDP in Uzbekistan in 2005 following the World Development Indicators data with no data reported for subsequent years 3 Montenegro and Russia emerge as outliers given their far higher ratios of market capitalisation These are 104 and 70 per cent respectively and they are far above of some West European countriesrsquo ratios including Germany and comparable to the ones in China and USA
6
finance was an obstacle to their operations and the averages for the individual countries in
the dataset are shown in Figure 3 With exception of Bosnia and Uzbekistan4 SMEs in all
transition economies are more financially constrained than larger firms although as our
empirical results show (see Section 5) the difference in perception of financial constraints
has been largely eliminated between smaller and larger firms during the recent global
financial crisis
Figure 3 to be inserted here
It has previously been argued that a low reliance on outside financing scarce use of
equity finance5 and low level of inter-firm trade financing is a common feature of small firms
across the transition region of Europe and Central Asia (Klapper et al 2002 Pissarides
1998 2001) Furthermore Klapperrsquos et al (2002) find almost no use of long-term debt
attributing this to the underdevelopment of the banking sector weak collateral law and poor
credit information registries Their evidence also shows virtually zero reliance of SMEs
across the 15 Eastern European countries on trade credit with the exception of Hungary and
to a lesser extent of the Czech Republic Poland and Romania They explain this by
insufficiency of partner firmsrsquo internal funds or their inability to access external borrowings to
become able to finance extension of trade credit Low reliance on trade credit may be also
attributed to low foreign presence in some countries of the region as multinationals could
extend trade credit to local firms including SMEs (Klapper et al2002)
Figure 4 shows the relative importance of financing sources used for purchase of fixed
assets by SMEs in the transition economies The data underlying this figure are the relative
percentages of the financing sources firms used in the year preceding a BEEPS survey year
in the BEEPS 2002-2009 surveys The surveys group financing sources into the following six
types internal funds or retained earnings ownersrsquo contribution or issued new equity shares
[funds] borrowed from private banks [funds] borrowed from state-owned banks purchases
on credit from suppliers and advances from customers and other (moneylenders friends
relatives non-banking financial institutions) Figure 4 suggests that SMEs in the transition
economies tend to largely rely on their internal funds or retained profits in funding their
investment Only about 23 per cent of small and medium-sized firms rely on borrowing from
private banks Trade credit and equity finance occupy similar shares in funding SMErsquos
investment decisions and account for the mere 9 per cent of total purchase of fixed assets
4 In Bosnia amp Uzbekistan larger firms are marginally more constrained than smaller ones (at 10 percent level of significance) 5 Small firms may also decide to limit their issuance of outside equity to avoid reduction in control of their firms (Scherr et al1990 and Hamilton and Fox 1998 cited in Klapper et al 2002)
7
According to Cull (2007) trade credit can be seen as substitute for loans for private firmsrsquo
trading partners that are shut out of financial credit market Other sources include borrowing
from informal money lenders and family and these emerge as the third important source of
funding SMEsrsquo investment after internal funds and bank credit We expect the informal
finance to be mostly comprised of equity provided by family and friends as funding obtained
from informal private money lenders was overly expensive with the premium standing at least
20 percentage points above that charged by local intermediaries (Pissarides 1998)
Figure 4 to be inserted here
In conclusion we note that the number of studies of the financing decisions of small
and medium-sized enterprises in emerging markets and in particular in the former centrally
planned economies or previously heavily regulated economies such as India has been rather
limited (see eg Nivorozhkin 2005 Delcoure 2007 Crnigoj 2007 Chakraborty 2008
Girma et al 2008 Li et al 2009 Correa et al 2010 Love and Zaidi 2010) We contribute to
this literature by analysing for SMEs in these countries the determinants of the following five
financing options retained earnings private loan (loan finance from private banks) trade
credit private equity (ownersrsquo equity) and informal finance In this study the phrase lsquoinformal
financersquo is an umbrella term that helps condense in one category funds from moneylenders
friends relatives non-banking financial institutions Our results allow us to shed more light
on whether and how the theories of financing choices apply to transition countries in the
credit crunch environment
The following section discusses theories pertaining to small firm financing and how this
may be affected by a financial crisis
3 Small Firm Financing and the Effect of Crisis Theoretical Considerations and
Hypotheses
31 Theoretical arguments
When analysing financing choices of SMEs we first turn to the two cornerstone
theories of explaining leverage the trade-off theory and the pecking order hypothesis (POH)
While the former states that firms may prefer debt to equity in the presence of corporate tax
subject to the costs of potential financial distress stemming from borrowing large amounts
(Modigliani and Miller 1958) the latter suggests that the firms first finance their investment
out of retained earnings as this is the cheapest and the most readily available alternative
then out of debt and lastly via issuing equity which is seen as the most expensive option to
8
the firm (Arnold 2008) More recent literature on firm financing started to look closer at and
emphasize the importance of other sources such as trade credit especially for the small and
medium firms using mostly the data on developed economies For instance Berger amp Udell
(1998) stress the importance of trade credit to the short-term financing of small firms Bevan
and Danbolt (2002) estimate that trade credit account for 62 per cent of total liabilities of UK
firms
The role of trade credit has been seen by some researchers as a substitute of bank
lending for liquidity-constrained firms (Cull 2007) such as SMEs One of the benefits of trade
credit compared to the bank lending is that it allows to partly get around the information
asymmetry problem between the lender and the borrowing SME as business partners would
have more information about the ability of the borrower to repay and about such reputation of
the borrower in the industry Meltzer (1960) Nielsen (2002) and Petersen and Rajan (1997)
argue that trade credit may also provide a means of alternative financing under the tight
monetary conditions such as credit crunches when financial institutions are less able or
willing to provide loans to SMEs In support of this hypothesis Atanasova and Wilson (2003
2004) and Mateut et al (2006) find that under tight monetary conditions firms tend to
substitute bank loans with trade credit However the findings in Bernanke and Gertler (1995)
and Gertler and Gilchrist (1993) do not agree with this hypothesis In line with these authors
Taketa and Udell (2007) using a sample of Japanese SMEs after the crisis years find that
bank lending and trade credit are complements rather than substitutes Love and Zaidi
(2010) report that the use of trade credit by East Asian firms has declined after the 1998
financial crisis together with the use of bank loans Finally interesting enough there is
some empirical evidence which suggests that in the context of transition economies there
may be a higher reliance of SMEs on trade credit in the period of crisis More specifically
focusing on the panel of 1686 firms in Bulgaria Hungary Latvia Lithuania Romania and
Turkey in 2007 and 2009 Klapper and Randall (2010) find that during periods of contractions
in bank credit buyers might depend more on trade credit (although primarily to be used for
short-term financing) that may be particularly true for small firms This provides some support
for the hypothesis that the two sources of finance namely bank loans and trade credit in the
context of transition and emerging economies can be seen as substitutes in period of crisis
Another source of firm financing that has recently received increased attention is
private equity Private equity consists of investments by private individual investors or firms
(business angels investments funds) as well as business ownersrsquo contributions to their
equity The lsquobusiness angelsrsquo type of private equity is currently on the rise in the developed
countries as well as emerging markets such as India Brazil China Malaysia However
ownersrsquo contribution is a far more widespread type of private equity in countries under
consideration Generally SMEs are prone to various types of business and financial risks
9
and it would be very important for them to try and hedge against these risks Zou and Adams
(2008) look at the effect of property insurance on the public firmsrsquo borrowing capacity in
China while Matthews and Scott (1995) in the US and Herbane (2011) in the UK investigate
the types of risk management used by the SMEs The findings point to a rather limited use by
the small and medium-sized enterprises of the risk management assessment and hedging
techniques
In the emerging markets of the post-Soviet bloc the use of risk management techniques
such as hedging with financial derivatives is virtually non-existent However an informal risk
management practice of accumulating cash out of profits and also of using informal lending
from family and friends to serve as a cushion in the times of financial distress as protection
against possible bankruptcy and as an instrument of insurance against risks has been one
way of accounting for the risky nature of SMEs in these countries Secondly many SMEs
sometimes use bankruptcy when they find themselves in the situation of financial distress
and then open a new firm without losing much of their personal assets (Radygin et al 2005)
These SMEs are oftentimes are registered as belonging to a relative or the SMEs could be
registered as founded by an artificially created third party with no links to the actual ownerrsquos
personal assets Recently banks in the new emerging economies such as Russia started a
practice of compulsory purchase of loan insurance if the SME is to take a loan from the bank
This serves as a risk insurance mechanism to a certain extent at the same time however
increasing the cost of bank financing However more recently this practice has attracted the
attention of the Federal Antimonopoly Service that ruled that there is evidence of collusion
between banks and insurance companies Overall we could conclude that the use of risk
management practices is very narrow and of a rather informal nature
The next sub-section explores in greater detail the institutional context of financing in the
situation of economic crisis
Empirical studies on small firm financing in the years of crisis are primarily motivated by
the informational asymmetries theories One of the most important contributions in the study
of the role of SMEs during business cycle has been the real business cycle (RBC) theory
(Bernanke and Gertler 1995 Bernanke Gertler amp Gilchrist 1998) The argument put forward
by the RBC theory is that SMEs face tighter liquidity constraints in terms of external financing
due to higher informational asymmetries associated with their activities the low value of
their assets to serve as collateral the high cost of monitoring small businesses given a small
scale of their investment projects and subsequently the unwillingness of banks to lend to
SMEs
During economic slowdowns when small businesses are even more in need of external
finance bank lending to them diminishes even further which tends to propagate the crisis if
the SMEs then go out of business (see for example Tornell and Westermann 2005) At the
10
same time as larger firms use more finance and tend to rely more on external funding they
may be hit harder by financial contraction in the situation of global crises when international
financial markets dry up so preventing larger firms from drawing upon them when required
They are also less flexible and it is more costly for them to restructure and downsize when
they are hit with external shocks Furthermore while SMEs tend to be more flexible in relying
on other sources of finance including trade credit contributed equity and informal finance
the financial structure of larger firms generally tends to be less diversified with a preference
often given to retained profits and bank finance following the pecking order theory Taken
together we may argue that both supply and demand for finance is more affected for larger
firms in the situation of external shocks
Based on the discussion presented in Sections 2 and 31 we further discuss three main
groups of factors which are likely to affect firmsrsquo perception of financial constraints and their
financing choice strategy These are as follows (1) firm size in general and in the period of
crisis (2) other firm- and industry-specific characteristics including foreign ownership export
orientation firmsrsquo social capital and the degree of competition and its pressure on the firm to
develop a new product and (3) country-level institutional parameters including the degree of
protection of property rights and the development of the financial sector
32 Size of the enterprise and the effect of crisis
With regards to the effect of firm size based on the general discussion in the literature
(see sections 2-31) we expect SMEs to be more financially constrained in their access to
external lending and respectively more reliant on internal funds This is due to insufficient
information that the bank can obtain about a particular SME as well as due to a potentially
lower size of collateral However this lower reliance of SMEs on external debt can potentially
be a source of flexibility during the crisis when formal financial markets dry up and when
even large well-established firms have difficulty obtaining bank credit Furthermore following
Atanasova and Wilson (2003 2004) Mateut et al (2006) and Klapper and Randall (2010) we
expect that under tight monetary conditions SMEs in transition economies are more likely to
switch to alternative forms of financing such as trade credit We also hypothesize that SMEs
are more likely to rely on ownersrsquo contributed equity which they tend to accumulate in good
times as part of their risk management strategy to use it as a cushion in the times of financial
distress In summary we expect the difference between the SMEs and large firms in their
reliance on bank finance to diminish during the crisis years and second SMEs to be more
flexible and rely more on other sources of finance such as trade credit and private equity in
the period of financial contractions
11
33 Firm- and industry- level factors
As far as the firm-level and industry-level variables are concerned we expect the
following results first the level of social capital of a firm as proxied by the inverse of the time
spent dealing with government regulations to indicate possible established connections with
public officials can positively affect its access to trade credit Next the industry-level
pressure on a firm from competitors to develop a new product may increase the firmrsquos
chances of obtaining a bank loan as the bank may perceive the firmrsquos operations as more
diversified and less risky (Isachenkova et al 2011) We also expect foreign competition and
the pressure it exerts on a firm innovation capability to play less important role for firm
financing decisions as SMEs are more likely to operate in market niches and they are
unlikely to compete with multinational enterprises In contrast we expect a pressure
originated from customers on a firm to innovate to increase a firmrsquos probability to rely more
on external sources of funding This may be attributed to the fact that a firm does not only
differentiate itself from other firms further with developing a new product but also assures a
demand for this product by responding to the needs of its existing customers The
guaranteed demand for a new product would be one of the most crucial factors taken into
account by bank managers or potential investors in decision-making concerning project
financing Thirdly international product certification may play a similar role with regards to
bank loans increasing the access to external funds Fourth we investigate the effect on the
choice of financing of the firm age with a square term Generally older firms may have
easier access to bank loans as more information is available about them to the lender (Beck
et al 2006 Canton et al 2010) however due to the particulars of the transition period
sometimes older firms may be less economically viable and unable to get a loan therefore
the sign of this coefficient is uncertain here Lastly we also look at the firmrsquos export
orientation which is expected to increase the reliance on bank lending and its ownership
type where we single out foreign and domestic private firms In the case of foreign firms
they are less likely to use private loans and rely instead on retained earnings and intra-
company funds transfers in the case of MNCs
34 Institutional environment
The impact of institutional variables on the financing choices of firms has been of the
utmost interest to economists and policy-makers during the period of transition (see for
example Stijn and Tzioumis 2006 Mitra et al 2008 see also Commander and Svejnar
(2009) for an in-depth and comprehensive analysis of the impact of various business
environment factors on firm performance using BEEPS 2002 - 2005 panel) In our analysis
12
we concentrate on two institutional factors the degree of protection of property rights and the
size of the formal financial sector which have been claimed to be of key importance for firmsrsquo
financing decisions (see Korosteleva and Mickiewicz (2011) for overview of the related
literature) As far as the property rights protection is concerned it is found to play crucial role
for firm growth and access to external finance (Aidis et al 2008 2010 Korosteleva and
Mickiewicz 2011 Estrin Korosteleva and Mickiewicz 2011) In the environment with weak
protection of property rights financial contracts are less likely to be concluded leading to the
underdevelopment of finance and credit rationing with small firms to be disproportionally
affected the most (Acemoglu and Johnson 2005) Beck et al (2004) show that in terms of
access to external finance small firms benefit disproportionally from higher levels of property
rights protection Lack of secure property rights may also discourage SMEs from taking full
advantage of opportunities to invest (Johnson et al 2002) In a survey of private small
manufacturing firms in Poland Russia Ukraine Romania and Slovakia Johnson et al
(2002) find that small firms tend to reinvest less of their earnings when they perceive their
property rights insecure They also find that the effect of the property rights system is of more
paramount importance for entrepreneursrsquo decisions to reinvest their earnings than availability
of formal finance Moreover if property rights are well-protected this lessens the extent of
potential threat of being expropriated by raidersbank lenders in an artificial bankruptcy
procedure which has been quite a significant issue for firms in Russia and other FSU states
(Radygin et al 2005 Sprenger 2002) Based on this we expect that strong property rights
are likely to encourage SMEs to use more debt as well as to use their own funds and
retained profits for investing in investment projects
With regards to the size of the formal finance as measured by the share of private
credit to GDP the relationship between financial depth and financial constraints has been
extensively studied (Beck et al 2006 also see for example Love 2003 who employing a
sample of 36 countries finds that financial development affects firmsrsquo investment by
increasing the availability of external finance) Financial intermediaries facilitate the risk
amelioration in the presence of problems created by information and transaction frictions by
developing expertise in risk assessment and in monitoring (Levine 1997 Barth et al 2006
Barth et al 2008) Developed financial institutions are found to be particularly beneficial for
small firms compared to large ones (Barth et al 2006 Beck et al 2005 2006 2008)
Pissarides et al (2003) show that financial constraints affect SMEs even more than
deficiency of the property rights protection Accordingly the size of the formal financial
system is expected to be positively related to the use of bank finance as a better functioning
financial system should help ease up borrowing constraints
4 Data and Methodology
13
41 Sample
To explore the determinants of the financial structure of small businesses we use the
2002-2009 Business Environment and Enterprise Performance Survey (BEEPS) data6 of
21867 firms covering 26 transition economies of Europe and Central Asia (ECA)7
The sample is primarily comprised of small and medium-sized businesses8 which
account for 893 per cent of the sample The sample is representative in terms of industrial
coverage with the majority of SMEs of the sample operating in manufacturing wholesale
and retailing industries
BEEPS dataset provides rich information on firm characteristics investment
behaviour and firmsrsquo perception of business environment including financial constraints
which are of a primary interest for our investigation of the effect of the recent financial crisis
on firmsrsquo perception of financial constraints Potentially we could use other micro-level data
characterising various domains of business environment captured by firmsrsquo perceptions for
investigating the effects of the institutional settings However using these micro-level
indicators as explanatory variables would make our study plagued with a problem of
endogeneity To avoid this we merge our firm-level data with country-level indicators
characterising various institutional domains The country level data were obtained from the
World Development Indicators (World Bank) and Polity IV databases (for further discussion
see below) Finally the BEEPs dataset contains other useful information which allows us to
shed light of the effect of for example social capital as proxied by the indirect measure of
possible connections with the authorities (see below for the definition of the variable) on firm
financing
42 Variable Definition and Measurement
Explanatory variables
6 This data is a joint project of the European Bank for Reconstruction and Development and World Bank The first survey was launched in 1999 The dataset used in the present study is an unbalanced panel covering the years of 2002 2005 2007-2009 7 The sample includes the following countries Albania Armenia Azerbaijan Belarus Bosnia Bulgaria Croatia Czech Republic Estonia FYROM Georgia Hungary Kazakhstan Kyrgyzstan Latvia Lithuania Moldova Montenegro Poland Romania Russia Serbia Slovakia Slovenia Tajikistan and Ukraine We exclude Uzbekistan as an outlier from our sample We also exclude Turkey as it is not classified as a post-communist country undertaking transition from a planned to a market economy 8 We utilize the EU employment criterion to define small and medium-sized businesses More specifically businesses are defined as micro if they employ 9 and less employees small ndash between 10 and 49 medium ndash between 50 and 249 and large ndash over 250 employees Respectively SMEs are defined as firms employing less than 249 firms
14
To test our main hypothesis of the effect of a firm size on firmsrsquo perception of financial
constraints we introduce a dummy variable denoting small and medium-sized business
coded as 1 if firms are classified as small or medium-sized businesses according to the EU
definition based on the employment criterion For robustness of our results we also use a
continuous variable denoting a size of employment as measured by the natural logarithm of
employment9 The obtained results are consistent with the ones using the SME indicators
To capture the effect of the recent financial crisis we introduce a crisis dummy coded
as 1 if the year of survey is equal to 2008 or 200910
We also introduce a number of firm-level controls which include age of firm11 type of
ownership including private and foreign ownership export orientation and whether a firm
has an internationally certified product all equal to 1 if a business has a respectively listed
characteristic and zero otherwise We also examine the effect of various sources of pressure
on firms to innovate ndash the indicators which are considered to be important for firm investment
decisions Respectively the pressure for innovation may stem from domestic competition
foreign competition and customers To capture the effect of a firmrsquos social capital we
introduce an indicator which indirectly may capture some possible connections of a firm with
authorities It is proxied by time spent by each firm on dealing with government regulations
We assume the less time firms spend dealing with government regulations the more likely
they have some established connections with public officials which allow them to avoid
burdensome regulation procedures
In our study we also introduce a number of country-level variables which characterize
the institutional environment in the countries covered by our sample More specifically we
include an indicator of the financial development as measured by the ratio of domestic credit
to private sector to GDP (one year lag to avoid potential endogeneity) obtained from the
World Bank World Development Indicators (World Bank 2011) This measure has been used
in previous studies (Klapper et al 2006) and it is expected to be of a primary importance for
transition economies where firms tend to rely more on bank finance rather than capital
markets We also introduce a measure of property rights protection (a one year lag) proxied
by the indicator of effective constraints imposed on the executive branch of the government
and obtained from Polity IV project12 This measure of property rights protection is
9 These results are not reported here to save some space However they can be obtained from authors upon request 10 Here it is important to note that although the financial crisis has started in 2007 in the USA it spread to transition economies in 2008-2009 11 Some studies find a non-monotonic relationship between age and firm decision-making In this study we introduce a squared term of age along with a age variable to capture this possible non-linearity 12 Available from httpwwwsystemicpeaceorgpolitypolity4htm
15
considered to be superior to other indicators including the index of property rights reported
by the Heritage Foundation ndashWall Street Journal (for further discussion see Acemoglu and
Johnson 2005 Glaeser et al 2004 Estrin Korosteleva and Mickieiwcz 2011)
In the present study we also introduce macroeconomic controls including cyclical
economic performance as measured by the one year lag of the GDP annual growth rate
and the level of economic development as proxied by a set of GDP pc dummies denoting
the five quintiles of its distribution to address the problem of potential multicollinearity with the
measure of financial development
Finally we include industry and country controls in all our specifications Introducing
country dummies into analysis allows to control for cross-country heterogeneity
For further definition of all variables their descriptive statistics and correlation matrix
see Tables 1-2
43 Dependent variables
To investigate the effect of a firmrsquos size on its perception of financial constraints we
construct a dummy variable coded as 1 capturing a major and very severe obstacle for
access to finance and 0 otherwise
The firm financing choices are defined by the five individual dependent variables
associated with tobit financial choice equations in the seemingly unrelated regression
equations model
One important thing to mention here is the inability to distinguish between
owninternal funds and external private equity considered as one of the limitations of the
2002-2009 BEEPS dataset In the period under investigation BEEPS offers two questions
which aim to capture the use of equity The first one centres around retained earnings and
the second one shows ownersrsquo contributions and private equity or issued new equity
Following some theoretical considerations discussed in sections 2 and 3 in the context of
SMEs we expect the second element of equity to be primarily comprised of existing ownersrsquo
new contributions rather than private equity
Thus the indicator of financial choices represents a set of five individual dependent
variables including retained earnings contributed earnings private borrowing informal
finance trade credit with each of them constructed as a share in total financing of SMErsquos
investment decisions (see Table 1)
44 Methods
16
In this study we employ a number of estimators to obtain robust results More
specifically we use a probit model to investigate the effect of a firm size and the recent
financial crisis on firmsrsquo perception of financial constraints The effect of a firm size in the
situation of crisis is captured by the introduction of the interaction term between firm size as
proxied by the SME indicator and a financial crisis dummy
We further employ the seemingly unrelated regression equations model combined
with the tobit approach for studying firmsrsquo financial structure
Probit model of perception of financial constraints
In the probit model the probability of a firmrsquos perception of financial constraints as
major(j = 1) can be written as follows
( ) ( )int ++
++
infinminus
minus===
ijitj uXjitiitit ijitjuXjy uX
βα βαππ 212-
)()(2 21exp|Pr
Where ity is our measure of financial constraints as perceived by firms and itX is a
set of our explanatory variables discussed in detail in sections 3-4 Here it is important to
note that the interaction term in a probit model cannot be interpreted in a similar way as in
linear models and disregarding this may lead to misleading estimates of the interaction
effect which is of crucial importance for our study (Norton Wang and Ai 2004) Respectively
for robustness of our results here we follow the framework suggested by Norton Wang and
Ai (2004) to account for the model nonlinearity The adjusted marginal effects for the
interaction term are reported in the note to Table 313
Simultaneous Model of Financing Choices
As mentioned above we next model the choice of all five financing choices explicitly
We also hypothesise (following Isachenkova et al 2011) that firm financing choices are likely
to be determined jointly A standard way of modelling jointly determined indicators is a
system of equations - SURE ndash seemingly unrelated regression equations where equations
are linked only by their errors (Zellner 1962) We therefore model the five types of sources of
finance (internal funds private bank borrowing informal finance trade credit and private
13 We also run a probit regression for a split sample of (1) SMEs and (2) large firms to check the robustness of our results (based on the interaction term) while addressing a problem of multicollinearity between a crisis variable and its interaction term with a SME variable The correlation coefficient between a crisis variable and its interaction term with a SME variable is equal to 93 This can be attributed by the problem of a sample being overrepresented by SMEs which constitute 90 of all surveyed firms The results remain robust and can be available from authors upon request
17
equity) using a SURE framework within which we specify a set of five tobit regressions with
correlated residuals
We employ the STATA cmp module which allows to it Seemingly Unrelated Regressions
using the simulated likelihood method such as the Geweke Hajivassiliou and Keane (GHK)
algorithm (for further discussion see Roodman 2008) We utilise a tobit equation to model
each individual financial choice of firms because our dependent financing choices variables
are continuous but their range is constrained (censored) with a substantial number of
observations either equal to zero denoting those who do not use the respective source of
finance or to 100 showing the opposite Other observations are positive and may produce
many different outcomes (Verbeek 2000) Each tobit equation uses a set of identical
explanatory variables that proxy factors which could possibly be associated with firmrsquos
financing choices including industry and country dummies
We also considered the bias caused by potential interdependence between the choice of
whether to invest and firmrsquos financing choices We accounted for the potential selection bias
by introducing into the financial choices SURE Tobit equations (second stage outcome
equations14) the inverse Millrsquos ratio calculated based on modelling the choice to invest in
fixed assets (first stage or selection equation) To identify the first stage of the Heckman
selection model we chose a variable which is correlated with the first stage dependent
variable (investment decision) but not with the second ones (financing choices) We used the
rate of capacity utilization as part of our identification strategy Capacity utilization shows the
percentage of capital stock in use the higher is the rate the more likely firms will increase
investment Batyaeva and Aukutsionek (2001) show that the rate of capacity utilization is
higher in the group of investing firms than in the group of non-investing firms in Russia15 We
calculated the inverse Millrsquos ratio based on the above selection equation16 and included it as
a control in the second stage SURE Tobit equations The inverse Millrsquos ratio has only proved
to be statistically significant in the private bank loan equation pointing to the potential
selection bias arising from the possibility that the factors determining the decision to invest
might differ from those determining the use of bank financing in purchasing fixed assets
14 We also attempted to estimate an investment equation jointly with Tobit financial choices equations within the SURE framework using However given the overall complexity of the model we failed to do this We proceeded further with a two-stage approach by estimating an investment probit equation and calculating the inverse Millrsquos ratio that we add into the outcome financial choices equations at the second stage of the analysis to test for the selection bias 15 We performed an independent sample t-test to check whether the rate of capacity utilization is statistically significantly higher for investing firms compared to non-investing firms for our sample The null hypothesis of no difference was rejected at 1 level of significance 16 To economize on space we do not report the results of the investment probit equation but they are available from authorsrsquo upon request
18
Finally In Table 6 we attempt to condition the determinants of financing constraints
declared by SMEs on the relative percentage increase of trade credit in total funds used for
real investment As mentioned above in Section 2 the timings of measuring the composition
of financing sources precede by a year the timings of measuring the perceptions of financing
constraints That feature of the BEEPSrsquo design allays a likely concern about the endogeneity
of the relative proportion of trade credit and enables causal inference We too report in thre
note to Table 4 the adjusted marginal effects for the interaction term of the SME dummy with
the trade credit variable
In the next section we discuss our empirical results
5 Empirical Results
Table 3 reports the results of the probit model with the marginal effects for firmsrsquo
perception of financial constraints while Tables 4-5 summarize the results of SURE tobits for
a more detailed breakdown of five financing choices More specifically Table 4 reports the
results based on the whole sample to give a comparative perspective on SMErsquos financing
strategy vis-a-vis large businesses whereas Table 5 reports the results based on a
subsample of small and medium-sized firms to shed some light on their financing choices in
the period of crisis
Perception of financial constraints
Table 3 shows that generally small and medium-sized enterprises feel more financially
constrained with the coefficient for SME dummy in relation to the large firms being positive
and significant which is consistent with our discussion in sections 2-3 However the
coefficient of the interaction term with the Crisis dummy turns out to be negative and
significant in relation to the perception of financial constraints as a major obstacle and it
tends to outweigh the effect of a SME dummy when we calculate marginal effects The effect
of the interaction terms with the crisis remains robust after we adjust for non-linearity using
the framework proposed by Norton Wang and Ai (2004)17 Overall these results confirm
that small and medium-sized enterprises are much less financially constrained during the
crisis years with their perceptions close to those of the large firms This result is a polar
opposite to that obtained for the SMEs in the UK (Fraser 2009) which finds that not only do
SMEs generally feel more financially constrained but they report to be even more so during
17 We also check the robustness of our results to the potential problem of multicollinearity between a crisis dummy and its interaction term with SME by splitting a sample and testing the same specification separately for SMEs and large firms We also perform another robustness check by breaking a SME dummy into three subsequent dummies namely micro- small- and medium-sized firms The difference in perception of financial constraints gets almost eliminated in the case of small firms and is largely reduced in the case of micro firms whereas it is less so for medium-sized firms
19
the last crisis We could explain this striking difference by the peculiarities of the SMEs
functioning in new emerging economies The lower reliance of SMEs on external debt in
good times (as shown by results which are discussed below) gives SMEs some flexibility
during the crisis when formal financial markets dry up Jointly with overall flexibility to make
necessary cost cuts and to restructure a business this overall lower reliance on external
funding and the use of alternative sources of financing makes SMEs feel less financially
constrained under the crisis as compared to larger firms
We also find that a more developed financial sector as proxied by domestic private
credit as proportion of GDP helps ease up financial constraints This is in line with the
general literature suggesting that better functioning financial intermediaries facilitate the risk
amelioration in the presence of problems created by market frictions (Levine 1997 Barth et
al 2006 Barth et al 2008)
Unfortunately we fail to find any significant effect of the property rights protection on
firmsrsquo perception of financial constraints that may be explained by the fact that the effect of a
more developed financial sector is likely to outweigh the effect of the property rights
protection
Finally we also find that foreign ownership and international product certificate may
reduce firmsrsquo borrowing constraints while any pressure from domestic or foreign competition
so is pressure from the customers to innovate will increase firmrsquos perception of financial
constraints as major given that firms envisage the need to secure external funding for RampD
or any other innovation-related activities
Financing choices for investment in fixed assets
The results in Table 4 indicate that small enterprises tend to rely more on internal funds
and less on bank loans but they are no different from larger firms in respect of using informal
funds trade credit or private equity which is generally consistent with our discussion in
Sections 2 and 3 The results of Table 5 suggest however that under crisis small and
medium-sized firms tend to switch to other sources of finance such as trade credit and
ownerrsquos contributed equity and to respectively reduce the reliance on retained earnings
perhaps because they decrease due to the negative impact of crisis internal funds With
regards to our discussion of SMEsrsquo risk management we note that the use of private equity
(ownerrsquos contribution) during the crisis years increases which could indicate that the ownerrsquos
funds are used as a cushion in the period of financial distress
An interesting insight regarding the use of trade credit emerges for SMEs in our
sample although in non-crisis years small and medium-sized businesses are not significantly
different from larger firms in terms of reliance on trade credit SMEs tend to finance a
significantly higher proportion of their fixed asset investment by trade credit than large firms
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Atanasova and Wilson 2003 Bank Borrowing Constraints and the Demand for Trade Credit
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Barth J G Caprio and R Levine 2006 Rethinking Bank Regulation Till Angels Govern
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Beck T A Demirguumlccedil-Kunt and V Maksimovic 2004 Financing patterns around the world
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Beck T A Demirguumlccedil-Kunt L Laeven and V Maksimovic (2006) ldquoThe Determinants of
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Beck T A Demirguumlccedil-Kunt and V Maksimovic 2008 ldquoFinancial Patterns Around the World
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Berger A amp G Udell 1998 The Economics of Small Business Finance The Role of
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and Finance 22 613ndash73
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Policy Transmission NBER Working Papers 5146 National Bureau of Economic Research
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Bernanke B M Gertler amp S Gilchrist 1998 The Financial Accelerator in a Quantitative
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Bevan A and J Danbolt 2002 Capital structure and its determinants in the UK - a
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Bygrave W 2003 Financing Entrepreneurs and their Ventures In P Reynolds W Bygrave
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Chakraborty I 2008 Capital Structure in Emerging Stock Market The Case of India
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Performance Review of Economics and Statistics 931 309-337
Correa PG Fernandes AM amp Uregian C 2010 Technology Adoption and the Investment
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Cull R and L C Xu 2007 Formal Finance and Trade Credit during Chinarsquos Transition
World Bank Policy Research Working Paper 4204
De La Torre AM Peria and S Schmukler 2008 Bank Involvement with SMEs Beyond
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Delcoure N 2007 The Determinants of Capital Structure in Transitional Economies
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Didier T Hevia C and Schmukler SL 2011 How Resilient Were Emerging Economies to the Global Crisis World Bank Policy Research Working Paper No 5637
Estrin S and T Mickiewicz 2010 Entrepreneurship in Transition Economies The Role of
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httpftpizaorgdp5481pdf
Ge Y and J Qiu 2007 Financial Development Bank Discrimination and Trade Credit
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Economics 95(1) (Mar 1993) 43-64
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Fraser S 2009 Small Firms in the Credit Crisis Evidence from the UK Survey of SME Finances Economic and Social Research Council Report Available at httpwww2warwickacukfacsocwbsresearchcsmeresearchlatestsmall_firms_in_the_credit_crisis_v3-oct09pdf Herbane B 2011 Small business research Time for a crisis-based view International Small
Business Journal 28(1)43ndash64
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Financing in Eastern Europe World Bank Policy Research Working Paper 2933
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27
Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
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Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
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Evidence from Small and Medium Size Enterprises in Russia and Bulgaria Journal of
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Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
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28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
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Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
3
Our study also links the BEEPS measure of financing constraints with relative changes in the
composition of investment finance In particular we examine whether an increase in the
relative percentage of alternative sources of finance such as trade credit has an impact on
the degree of financing constraints
More specifically we first look at the effect of our variables of interest on the firmsrsquo
perceptions of access to finance in a probit model We find that SMEs though more
financially constrained in general are less so during the crisis so that their perceptions of the
financial constraints do not significantly differ from those of larger firms We further
investigate their financing choices and our findings suggest that the reduction in the degree
of perceived financial constraints between small and large firms may be attributed to SMEs
being more flexible in the choice of the sources of financing such as trade credit and ownerrsquos
contribution This finding sheds new light on the role of SMEs vs large firms as channels of
propagating of monetary and real shocks during a recession
Our work is organised as follows Section Two discusses the peculiarities of firm
financing in transition economies with a specific focus on small businesses Section Three
discusses theoretical and empirical issues pertaining to the determinants of smaller
businessesrsquo financing including in the context of financial crisis Based on that we postulate
our hypotheses Section Four describes the data and the methodology Empirical results
follow in Section Five Finally Section Six presents conclusions and policy implications
2 The stylised facts about SME financing in Transition Economies
To launch and operate new ventures entrepreneurs require financial resources that can
either come from their own savings or are external borrowed in formal and informal financial
markets or raised through issuance of equity shares Empirical studies on SME financing
show that smaller businesses typically rely predominantly on their own equity and informal
finance (primarily family and friendsrsquo funds and investment of other individuals comprising
business angels) and exhibit a moderately low level of formal external financing (Bates
1997 Ravid and Spiegel 1997 Huyghebaert 2001 Bygrave 2003)
The situation with SME finance in transition economies is more complex given that
neither of these sources was widely available in the early stage of transition (Estrin and
Mickiewicz 2010) Although individuals were allowed to deposit their savings in the state
savings banks the accumulation of wealth was low Furthermore the savings that individuals
kept with the state savings bank were eroded by hyperinflation at the start of transition For
these reasons internal finance and funds from family and friends were relatively scarce at the
start of transition and were likely to play less prominent role than in non-transition countries
and in the period of crisis even more so given high sensibility of individualsrsquo savings to
external shocks
4
The required funding was also difficult to raise via bank borrowing given the
underdeveloped and inefficient financial system inherited from the planned economy where
the role of finance was passive for finance served as a monetary counterpart of planning
directives Despite the emergence of new private banks the competition in the banking
sector across the region remained low which can partly be explained by the capital
weakness of new banks making the market very segmented The dominance of state-owned
or (partly) privatised commercial banks made the banking environment very concentrated
with these banks expressing preference for large state-owned or privatised enterprises at the
cost of discouraging new entrants (Rostowski 1995 Berglof and Bolton 2002) A number of
newly established banks did not have enough experience in private sector lending
(Pissarides 1998) and in the situation of a great economic uncertainty preferred occupying
some niches to riskier lending to the real sector in particular to SMEs Such niches for
example included foreign currency transactions short-term lending on the inter-bank market
and operations with governmental securities (Korosteleva and Lawson 2010) Other new
banks so-called lsquopocket banksrsquo were mainly established by privatised larger enterprises to
serve the purpose of financing their own activities bringing to the surface the problem of
connected lending Given all these peculiarities of banksrsquo establishment at the start of
transition small de novo firms were severely restricted in their access to the formal credit
market The situation was aggravated further by the credit crunch that was a result of
macroeconomic stabilisation measures taken by transition governments to curb inflation
High nominal interest rates were a far larger problem for new ventures which typically face
an initial period of negative profitability1
The progress in reforming the financial sector was slow This is confirmed by the EBRD
annual transition indicators measuring the progress in reforms They include (1) the banking
reform and interest rate liberalisation and (2) the securities market and non-bank financial
institutions For those two the average scores for the region reached only 24 and 21
respectively on the scale from 1 (little progress) to 43 (developed market economies
standards) the decade after the transition began In 2009 only the Central and Eastern
European countries (CEECs) which joined the EU scored as high as 4 in both areas of
financial institutional reforms with Latvia Lithuania Slovakia Slovenia Bulgaria and
Romania still being one score down in the area of securities markets The latter three
countries also scored lower than their CEE counterparts in the area of banking sector reform
Some CIS countries such as Belarus Turkmenistan and Uzbekistan viewed as the laggards
in transition still have rankings as low as 1 (Turkmenistan) and 2 (Azerbaijan
1 Pissarides (1998) argues that SMEs often reinforce banksrsquo perceptions of them being unreliable borrowers given frequent under-reporting of profits due to tax avoidance purposes or failure to register ownership of assets prompting lenders to penalise SMEs by charging them higher premium
5
BelarusKyrgyzstan Tajikistan and Uzbekistan) in both areas of the financial institutional
reforms Overall after the years of the financial sector reform the majority of transition
economies still have rather shallow domestic credit systems (Figure 1) and relatively
underdeveloped capital markets with market capitalisation ratio varying from as low as 16
per cent of GDP in Kyrgyzstan and Armenia2 to as high as 40-50 per cent in Croatia amp
Kazakhstan respectively in 2009 with Montenegro and Russia standing out compared with
the rest of the region3
Figures 1 amp 2 to be inserted here
A number of empirical studies further confirm that financial constraints in transition
economies constitute one of the main obstacles for start-up entry and growth (Pissarides
1998 1999 2001 Pissarides et al 2003 Klapper et al 2002) Pissarides (2001) concludes
that lack of access to finance is more binding for SMEs than larger businesses with the
severity of this constraint being stronger in South-East Europe compared to other transition
economies including the Commonwealth of Independent States (CIS) In their study of SME
growth in Russia and Bulgaria Pissarides et al (2003) find that financial constraints hamper
SME growth and that SMEs resort to the use of internal funds to overcome constraints on
external finance This is similar to Johnsonrsquos et al (2002) findings suggesting that internal
finance can substitute for external finance (see also Lizal and Svejnar (2002) for similar
conclusions) Pissarides et al (2003) also show that financial constraints affect SMEs more
than barriers related to property rights issues Drawing on the data on 15 Eastern European
countries Klapper et al (2002) show that financial constraints affect SMEs longer-term ability
to grow Finally Gorodnichenko and Schnitzer (2010) show that financial constraints restrain
the ability of domestically-owned firms to innovate and export thus inhibiting productivity
growth They also argue that this negative effect is magnified due to financial constraints
forcing export and innovation activities to become substitutes whereas they are commonly
found to be complements
We complement these studies with the most recent empirical evidence on the
determinants of SMEsrsquo perception of financial constrains in transition economies which
comes from the 2002-09 BEEPS dataset The BEEPS self-reported measure of financing
constraints unites in one termed lsquoaccess to financersquo metric both quantity and price
constraints In the surveys firms were directly asked to indicate the extent to which access to
2 In fact it goes as low as 02 per cent of GDP in Uzbekistan in 2005 following the World Development Indicators data with no data reported for subsequent years 3 Montenegro and Russia emerge as outliers given their far higher ratios of market capitalisation These are 104 and 70 per cent respectively and they are far above of some West European countriesrsquo ratios including Germany and comparable to the ones in China and USA
6
finance was an obstacle to their operations and the averages for the individual countries in
the dataset are shown in Figure 3 With exception of Bosnia and Uzbekistan4 SMEs in all
transition economies are more financially constrained than larger firms although as our
empirical results show (see Section 5) the difference in perception of financial constraints
has been largely eliminated between smaller and larger firms during the recent global
financial crisis
Figure 3 to be inserted here
It has previously been argued that a low reliance on outside financing scarce use of
equity finance5 and low level of inter-firm trade financing is a common feature of small firms
across the transition region of Europe and Central Asia (Klapper et al 2002 Pissarides
1998 2001) Furthermore Klapperrsquos et al (2002) find almost no use of long-term debt
attributing this to the underdevelopment of the banking sector weak collateral law and poor
credit information registries Their evidence also shows virtually zero reliance of SMEs
across the 15 Eastern European countries on trade credit with the exception of Hungary and
to a lesser extent of the Czech Republic Poland and Romania They explain this by
insufficiency of partner firmsrsquo internal funds or their inability to access external borrowings to
become able to finance extension of trade credit Low reliance on trade credit may be also
attributed to low foreign presence in some countries of the region as multinationals could
extend trade credit to local firms including SMEs (Klapper et al2002)
Figure 4 shows the relative importance of financing sources used for purchase of fixed
assets by SMEs in the transition economies The data underlying this figure are the relative
percentages of the financing sources firms used in the year preceding a BEEPS survey year
in the BEEPS 2002-2009 surveys The surveys group financing sources into the following six
types internal funds or retained earnings ownersrsquo contribution or issued new equity shares
[funds] borrowed from private banks [funds] borrowed from state-owned banks purchases
on credit from suppliers and advances from customers and other (moneylenders friends
relatives non-banking financial institutions) Figure 4 suggests that SMEs in the transition
economies tend to largely rely on their internal funds or retained profits in funding their
investment Only about 23 per cent of small and medium-sized firms rely on borrowing from
private banks Trade credit and equity finance occupy similar shares in funding SMErsquos
investment decisions and account for the mere 9 per cent of total purchase of fixed assets
4 In Bosnia amp Uzbekistan larger firms are marginally more constrained than smaller ones (at 10 percent level of significance) 5 Small firms may also decide to limit their issuance of outside equity to avoid reduction in control of their firms (Scherr et al1990 and Hamilton and Fox 1998 cited in Klapper et al 2002)
7
According to Cull (2007) trade credit can be seen as substitute for loans for private firmsrsquo
trading partners that are shut out of financial credit market Other sources include borrowing
from informal money lenders and family and these emerge as the third important source of
funding SMEsrsquo investment after internal funds and bank credit We expect the informal
finance to be mostly comprised of equity provided by family and friends as funding obtained
from informal private money lenders was overly expensive with the premium standing at least
20 percentage points above that charged by local intermediaries (Pissarides 1998)
Figure 4 to be inserted here
In conclusion we note that the number of studies of the financing decisions of small
and medium-sized enterprises in emerging markets and in particular in the former centrally
planned economies or previously heavily regulated economies such as India has been rather
limited (see eg Nivorozhkin 2005 Delcoure 2007 Crnigoj 2007 Chakraborty 2008
Girma et al 2008 Li et al 2009 Correa et al 2010 Love and Zaidi 2010) We contribute to
this literature by analysing for SMEs in these countries the determinants of the following five
financing options retained earnings private loan (loan finance from private banks) trade
credit private equity (ownersrsquo equity) and informal finance In this study the phrase lsquoinformal
financersquo is an umbrella term that helps condense in one category funds from moneylenders
friends relatives non-banking financial institutions Our results allow us to shed more light
on whether and how the theories of financing choices apply to transition countries in the
credit crunch environment
The following section discusses theories pertaining to small firm financing and how this
may be affected by a financial crisis
3 Small Firm Financing and the Effect of Crisis Theoretical Considerations and
Hypotheses
31 Theoretical arguments
When analysing financing choices of SMEs we first turn to the two cornerstone
theories of explaining leverage the trade-off theory and the pecking order hypothesis (POH)
While the former states that firms may prefer debt to equity in the presence of corporate tax
subject to the costs of potential financial distress stemming from borrowing large amounts
(Modigliani and Miller 1958) the latter suggests that the firms first finance their investment
out of retained earnings as this is the cheapest and the most readily available alternative
then out of debt and lastly via issuing equity which is seen as the most expensive option to
8
the firm (Arnold 2008) More recent literature on firm financing started to look closer at and
emphasize the importance of other sources such as trade credit especially for the small and
medium firms using mostly the data on developed economies For instance Berger amp Udell
(1998) stress the importance of trade credit to the short-term financing of small firms Bevan
and Danbolt (2002) estimate that trade credit account for 62 per cent of total liabilities of UK
firms
The role of trade credit has been seen by some researchers as a substitute of bank
lending for liquidity-constrained firms (Cull 2007) such as SMEs One of the benefits of trade
credit compared to the bank lending is that it allows to partly get around the information
asymmetry problem between the lender and the borrowing SME as business partners would
have more information about the ability of the borrower to repay and about such reputation of
the borrower in the industry Meltzer (1960) Nielsen (2002) and Petersen and Rajan (1997)
argue that trade credit may also provide a means of alternative financing under the tight
monetary conditions such as credit crunches when financial institutions are less able or
willing to provide loans to SMEs In support of this hypothesis Atanasova and Wilson (2003
2004) and Mateut et al (2006) find that under tight monetary conditions firms tend to
substitute bank loans with trade credit However the findings in Bernanke and Gertler (1995)
and Gertler and Gilchrist (1993) do not agree with this hypothesis In line with these authors
Taketa and Udell (2007) using a sample of Japanese SMEs after the crisis years find that
bank lending and trade credit are complements rather than substitutes Love and Zaidi
(2010) report that the use of trade credit by East Asian firms has declined after the 1998
financial crisis together with the use of bank loans Finally interesting enough there is
some empirical evidence which suggests that in the context of transition economies there
may be a higher reliance of SMEs on trade credit in the period of crisis More specifically
focusing on the panel of 1686 firms in Bulgaria Hungary Latvia Lithuania Romania and
Turkey in 2007 and 2009 Klapper and Randall (2010) find that during periods of contractions
in bank credit buyers might depend more on trade credit (although primarily to be used for
short-term financing) that may be particularly true for small firms This provides some support
for the hypothesis that the two sources of finance namely bank loans and trade credit in the
context of transition and emerging economies can be seen as substitutes in period of crisis
Another source of firm financing that has recently received increased attention is
private equity Private equity consists of investments by private individual investors or firms
(business angels investments funds) as well as business ownersrsquo contributions to their
equity The lsquobusiness angelsrsquo type of private equity is currently on the rise in the developed
countries as well as emerging markets such as India Brazil China Malaysia However
ownersrsquo contribution is a far more widespread type of private equity in countries under
consideration Generally SMEs are prone to various types of business and financial risks
9
and it would be very important for them to try and hedge against these risks Zou and Adams
(2008) look at the effect of property insurance on the public firmsrsquo borrowing capacity in
China while Matthews and Scott (1995) in the US and Herbane (2011) in the UK investigate
the types of risk management used by the SMEs The findings point to a rather limited use by
the small and medium-sized enterprises of the risk management assessment and hedging
techniques
In the emerging markets of the post-Soviet bloc the use of risk management techniques
such as hedging with financial derivatives is virtually non-existent However an informal risk
management practice of accumulating cash out of profits and also of using informal lending
from family and friends to serve as a cushion in the times of financial distress as protection
against possible bankruptcy and as an instrument of insurance against risks has been one
way of accounting for the risky nature of SMEs in these countries Secondly many SMEs
sometimes use bankruptcy when they find themselves in the situation of financial distress
and then open a new firm without losing much of their personal assets (Radygin et al 2005)
These SMEs are oftentimes are registered as belonging to a relative or the SMEs could be
registered as founded by an artificially created third party with no links to the actual ownerrsquos
personal assets Recently banks in the new emerging economies such as Russia started a
practice of compulsory purchase of loan insurance if the SME is to take a loan from the bank
This serves as a risk insurance mechanism to a certain extent at the same time however
increasing the cost of bank financing However more recently this practice has attracted the
attention of the Federal Antimonopoly Service that ruled that there is evidence of collusion
between banks and insurance companies Overall we could conclude that the use of risk
management practices is very narrow and of a rather informal nature
The next sub-section explores in greater detail the institutional context of financing in the
situation of economic crisis
Empirical studies on small firm financing in the years of crisis are primarily motivated by
the informational asymmetries theories One of the most important contributions in the study
of the role of SMEs during business cycle has been the real business cycle (RBC) theory
(Bernanke and Gertler 1995 Bernanke Gertler amp Gilchrist 1998) The argument put forward
by the RBC theory is that SMEs face tighter liquidity constraints in terms of external financing
due to higher informational asymmetries associated with their activities the low value of
their assets to serve as collateral the high cost of monitoring small businesses given a small
scale of their investment projects and subsequently the unwillingness of banks to lend to
SMEs
During economic slowdowns when small businesses are even more in need of external
finance bank lending to them diminishes even further which tends to propagate the crisis if
the SMEs then go out of business (see for example Tornell and Westermann 2005) At the
10
same time as larger firms use more finance and tend to rely more on external funding they
may be hit harder by financial contraction in the situation of global crises when international
financial markets dry up so preventing larger firms from drawing upon them when required
They are also less flexible and it is more costly for them to restructure and downsize when
they are hit with external shocks Furthermore while SMEs tend to be more flexible in relying
on other sources of finance including trade credit contributed equity and informal finance
the financial structure of larger firms generally tends to be less diversified with a preference
often given to retained profits and bank finance following the pecking order theory Taken
together we may argue that both supply and demand for finance is more affected for larger
firms in the situation of external shocks
Based on the discussion presented in Sections 2 and 31 we further discuss three main
groups of factors which are likely to affect firmsrsquo perception of financial constraints and their
financing choice strategy These are as follows (1) firm size in general and in the period of
crisis (2) other firm- and industry-specific characteristics including foreign ownership export
orientation firmsrsquo social capital and the degree of competition and its pressure on the firm to
develop a new product and (3) country-level institutional parameters including the degree of
protection of property rights and the development of the financial sector
32 Size of the enterprise and the effect of crisis
With regards to the effect of firm size based on the general discussion in the literature
(see sections 2-31) we expect SMEs to be more financially constrained in their access to
external lending and respectively more reliant on internal funds This is due to insufficient
information that the bank can obtain about a particular SME as well as due to a potentially
lower size of collateral However this lower reliance of SMEs on external debt can potentially
be a source of flexibility during the crisis when formal financial markets dry up and when
even large well-established firms have difficulty obtaining bank credit Furthermore following
Atanasova and Wilson (2003 2004) Mateut et al (2006) and Klapper and Randall (2010) we
expect that under tight monetary conditions SMEs in transition economies are more likely to
switch to alternative forms of financing such as trade credit We also hypothesize that SMEs
are more likely to rely on ownersrsquo contributed equity which they tend to accumulate in good
times as part of their risk management strategy to use it as a cushion in the times of financial
distress In summary we expect the difference between the SMEs and large firms in their
reliance on bank finance to diminish during the crisis years and second SMEs to be more
flexible and rely more on other sources of finance such as trade credit and private equity in
the period of financial contractions
11
33 Firm- and industry- level factors
As far as the firm-level and industry-level variables are concerned we expect the
following results first the level of social capital of a firm as proxied by the inverse of the time
spent dealing with government regulations to indicate possible established connections with
public officials can positively affect its access to trade credit Next the industry-level
pressure on a firm from competitors to develop a new product may increase the firmrsquos
chances of obtaining a bank loan as the bank may perceive the firmrsquos operations as more
diversified and less risky (Isachenkova et al 2011) We also expect foreign competition and
the pressure it exerts on a firm innovation capability to play less important role for firm
financing decisions as SMEs are more likely to operate in market niches and they are
unlikely to compete with multinational enterprises In contrast we expect a pressure
originated from customers on a firm to innovate to increase a firmrsquos probability to rely more
on external sources of funding This may be attributed to the fact that a firm does not only
differentiate itself from other firms further with developing a new product but also assures a
demand for this product by responding to the needs of its existing customers The
guaranteed demand for a new product would be one of the most crucial factors taken into
account by bank managers or potential investors in decision-making concerning project
financing Thirdly international product certification may play a similar role with regards to
bank loans increasing the access to external funds Fourth we investigate the effect on the
choice of financing of the firm age with a square term Generally older firms may have
easier access to bank loans as more information is available about them to the lender (Beck
et al 2006 Canton et al 2010) however due to the particulars of the transition period
sometimes older firms may be less economically viable and unable to get a loan therefore
the sign of this coefficient is uncertain here Lastly we also look at the firmrsquos export
orientation which is expected to increase the reliance on bank lending and its ownership
type where we single out foreign and domestic private firms In the case of foreign firms
they are less likely to use private loans and rely instead on retained earnings and intra-
company funds transfers in the case of MNCs
34 Institutional environment
The impact of institutional variables on the financing choices of firms has been of the
utmost interest to economists and policy-makers during the period of transition (see for
example Stijn and Tzioumis 2006 Mitra et al 2008 see also Commander and Svejnar
(2009) for an in-depth and comprehensive analysis of the impact of various business
environment factors on firm performance using BEEPS 2002 - 2005 panel) In our analysis
12
we concentrate on two institutional factors the degree of protection of property rights and the
size of the formal financial sector which have been claimed to be of key importance for firmsrsquo
financing decisions (see Korosteleva and Mickiewicz (2011) for overview of the related
literature) As far as the property rights protection is concerned it is found to play crucial role
for firm growth and access to external finance (Aidis et al 2008 2010 Korosteleva and
Mickiewicz 2011 Estrin Korosteleva and Mickiewicz 2011) In the environment with weak
protection of property rights financial contracts are less likely to be concluded leading to the
underdevelopment of finance and credit rationing with small firms to be disproportionally
affected the most (Acemoglu and Johnson 2005) Beck et al (2004) show that in terms of
access to external finance small firms benefit disproportionally from higher levels of property
rights protection Lack of secure property rights may also discourage SMEs from taking full
advantage of opportunities to invest (Johnson et al 2002) In a survey of private small
manufacturing firms in Poland Russia Ukraine Romania and Slovakia Johnson et al
(2002) find that small firms tend to reinvest less of their earnings when they perceive their
property rights insecure They also find that the effect of the property rights system is of more
paramount importance for entrepreneursrsquo decisions to reinvest their earnings than availability
of formal finance Moreover if property rights are well-protected this lessens the extent of
potential threat of being expropriated by raidersbank lenders in an artificial bankruptcy
procedure which has been quite a significant issue for firms in Russia and other FSU states
(Radygin et al 2005 Sprenger 2002) Based on this we expect that strong property rights
are likely to encourage SMEs to use more debt as well as to use their own funds and
retained profits for investing in investment projects
With regards to the size of the formal finance as measured by the share of private
credit to GDP the relationship between financial depth and financial constraints has been
extensively studied (Beck et al 2006 also see for example Love 2003 who employing a
sample of 36 countries finds that financial development affects firmsrsquo investment by
increasing the availability of external finance) Financial intermediaries facilitate the risk
amelioration in the presence of problems created by information and transaction frictions by
developing expertise in risk assessment and in monitoring (Levine 1997 Barth et al 2006
Barth et al 2008) Developed financial institutions are found to be particularly beneficial for
small firms compared to large ones (Barth et al 2006 Beck et al 2005 2006 2008)
Pissarides et al (2003) show that financial constraints affect SMEs even more than
deficiency of the property rights protection Accordingly the size of the formal financial
system is expected to be positively related to the use of bank finance as a better functioning
financial system should help ease up borrowing constraints
4 Data and Methodology
13
41 Sample
To explore the determinants of the financial structure of small businesses we use the
2002-2009 Business Environment and Enterprise Performance Survey (BEEPS) data6 of
21867 firms covering 26 transition economies of Europe and Central Asia (ECA)7
The sample is primarily comprised of small and medium-sized businesses8 which
account for 893 per cent of the sample The sample is representative in terms of industrial
coverage with the majority of SMEs of the sample operating in manufacturing wholesale
and retailing industries
BEEPS dataset provides rich information on firm characteristics investment
behaviour and firmsrsquo perception of business environment including financial constraints
which are of a primary interest for our investigation of the effect of the recent financial crisis
on firmsrsquo perception of financial constraints Potentially we could use other micro-level data
characterising various domains of business environment captured by firmsrsquo perceptions for
investigating the effects of the institutional settings However using these micro-level
indicators as explanatory variables would make our study plagued with a problem of
endogeneity To avoid this we merge our firm-level data with country-level indicators
characterising various institutional domains The country level data were obtained from the
World Development Indicators (World Bank) and Polity IV databases (for further discussion
see below) Finally the BEEPs dataset contains other useful information which allows us to
shed light of the effect of for example social capital as proxied by the indirect measure of
possible connections with the authorities (see below for the definition of the variable) on firm
financing
42 Variable Definition and Measurement
Explanatory variables
6 This data is a joint project of the European Bank for Reconstruction and Development and World Bank The first survey was launched in 1999 The dataset used in the present study is an unbalanced panel covering the years of 2002 2005 2007-2009 7 The sample includes the following countries Albania Armenia Azerbaijan Belarus Bosnia Bulgaria Croatia Czech Republic Estonia FYROM Georgia Hungary Kazakhstan Kyrgyzstan Latvia Lithuania Moldova Montenegro Poland Romania Russia Serbia Slovakia Slovenia Tajikistan and Ukraine We exclude Uzbekistan as an outlier from our sample We also exclude Turkey as it is not classified as a post-communist country undertaking transition from a planned to a market economy 8 We utilize the EU employment criterion to define small and medium-sized businesses More specifically businesses are defined as micro if they employ 9 and less employees small ndash between 10 and 49 medium ndash between 50 and 249 and large ndash over 250 employees Respectively SMEs are defined as firms employing less than 249 firms
14
To test our main hypothesis of the effect of a firm size on firmsrsquo perception of financial
constraints we introduce a dummy variable denoting small and medium-sized business
coded as 1 if firms are classified as small or medium-sized businesses according to the EU
definition based on the employment criterion For robustness of our results we also use a
continuous variable denoting a size of employment as measured by the natural logarithm of
employment9 The obtained results are consistent with the ones using the SME indicators
To capture the effect of the recent financial crisis we introduce a crisis dummy coded
as 1 if the year of survey is equal to 2008 or 200910
We also introduce a number of firm-level controls which include age of firm11 type of
ownership including private and foreign ownership export orientation and whether a firm
has an internationally certified product all equal to 1 if a business has a respectively listed
characteristic and zero otherwise We also examine the effect of various sources of pressure
on firms to innovate ndash the indicators which are considered to be important for firm investment
decisions Respectively the pressure for innovation may stem from domestic competition
foreign competition and customers To capture the effect of a firmrsquos social capital we
introduce an indicator which indirectly may capture some possible connections of a firm with
authorities It is proxied by time spent by each firm on dealing with government regulations
We assume the less time firms spend dealing with government regulations the more likely
they have some established connections with public officials which allow them to avoid
burdensome regulation procedures
In our study we also introduce a number of country-level variables which characterize
the institutional environment in the countries covered by our sample More specifically we
include an indicator of the financial development as measured by the ratio of domestic credit
to private sector to GDP (one year lag to avoid potential endogeneity) obtained from the
World Bank World Development Indicators (World Bank 2011) This measure has been used
in previous studies (Klapper et al 2006) and it is expected to be of a primary importance for
transition economies where firms tend to rely more on bank finance rather than capital
markets We also introduce a measure of property rights protection (a one year lag) proxied
by the indicator of effective constraints imposed on the executive branch of the government
and obtained from Polity IV project12 This measure of property rights protection is
9 These results are not reported here to save some space However they can be obtained from authors upon request 10 Here it is important to note that although the financial crisis has started in 2007 in the USA it spread to transition economies in 2008-2009 11 Some studies find a non-monotonic relationship between age and firm decision-making In this study we introduce a squared term of age along with a age variable to capture this possible non-linearity 12 Available from httpwwwsystemicpeaceorgpolitypolity4htm
15
considered to be superior to other indicators including the index of property rights reported
by the Heritage Foundation ndashWall Street Journal (for further discussion see Acemoglu and
Johnson 2005 Glaeser et al 2004 Estrin Korosteleva and Mickieiwcz 2011)
In the present study we also introduce macroeconomic controls including cyclical
economic performance as measured by the one year lag of the GDP annual growth rate
and the level of economic development as proxied by a set of GDP pc dummies denoting
the five quintiles of its distribution to address the problem of potential multicollinearity with the
measure of financial development
Finally we include industry and country controls in all our specifications Introducing
country dummies into analysis allows to control for cross-country heterogeneity
For further definition of all variables their descriptive statistics and correlation matrix
see Tables 1-2
43 Dependent variables
To investigate the effect of a firmrsquos size on its perception of financial constraints we
construct a dummy variable coded as 1 capturing a major and very severe obstacle for
access to finance and 0 otherwise
The firm financing choices are defined by the five individual dependent variables
associated with tobit financial choice equations in the seemingly unrelated regression
equations model
One important thing to mention here is the inability to distinguish between
owninternal funds and external private equity considered as one of the limitations of the
2002-2009 BEEPS dataset In the period under investigation BEEPS offers two questions
which aim to capture the use of equity The first one centres around retained earnings and
the second one shows ownersrsquo contributions and private equity or issued new equity
Following some theoretical considerations discussed in sections 2 and 3 in the context of
SMEs we expect the second element of equity to be primarily comprised of existing ownersrsquo
new contributions rather than private equity
Thus the indicator of financial choices represents a set of five individual dependent
variables including retained earnings contributed earnings private borrowing informal
finance trade credit with each of them constructed as a share in total financing of SMErsquos
investment decisions (see Table 1)
44 Methods
16
In this study we employ a number of estimators to obtain robust results More
specifically we use a probit model to investigate the effect of a firm size and the recent
financial crisis on firmsrsquo perception of financial constraints The effect of a firm size in the
situation of crisis is captured by the introduction of the interaction term between firm size as
proxied by the SME indicator and a financial crisis dummy
We further employ the seemingly unrelated regression equations model combined
with the tobit approach for studying firmsrsquo financial structure
Probit model of perception of financial constraints
In the probit model the probability of a firmrsquos perception of financial constraints as
major(j = 1) can be written as follows
( ) ( )int ++
++
infinminus
minus===
ijitj uXjitiitit ijitjuXjy uX
βα βαππ 212-
)()(2 21exp|Pr
Where ity is our measure of financial constraints as perceived by firms and itX is a
set of our explanatory variables discussed in detail in sections 3-4 Here it is important to
note that the interaction term in a probit model cannot be interpreted in a similar way as in
linear models and disregarding this may lead to misleading estimates of the interaction
effect which is of crucial importance for our study (Norton Wang and Ai 2004) Respectively
for robustness of our results here we follow the framework suggested by Norton Wang and
Ai (2004) to account for the model nonlinearity The adjusted marginal effects for the
interaction term are reported in the note to Table 313
Simultaneous Model of Financing Choices
As mentioned above we next model the choice of all five financing choices explicitly
We also hypothesise (following Isachenkova et al 2011) that firm financing choices are likely
to be determined jointly A standard way of modelling jointly determined indicators is a
system of equations - SURE ndash seemingly unrelated regression equations where equations
are linked only by their errors (Zellner 1962) We therefore model the five types of sources of
finance (internal funds private bank borrowing informal finance trade credit and private
13 We also run a probit regression for a split sample of (1) SMEs and (2) large firms to check the robustness of our results (based on the interaction term) while addressing a problem of multicollinearity between a crisis variable and its interaction term with a SME variable The correlation coefficient between a crisis variable and its interaction term with a SME variable is equal to 93 This can be attributed by the problem of a sample being overrepresented by SMEs which constitute 90 of all surveyed firms The results remain robust and can be available from authors upon request
17
equity) using a SURE framework within which we specify a set of five tobit regressions with
correlated residuals
We employ the STATA cmp module which allows to it Seemingly Unrelated Regressions
using the simulated likelihood method such as the Geweke Hajivassiliou and Keane (GHK)
algorithm (for further discussion see Roodman 2008) We utilise a tobit equation to model
each individual financial choice of firms because our dependent financing choices variables
are continuous but their range is constrained (censored) with a substantial number of
observations either equal to zero denoting those who do not use the respective source of
finance or to 100 showing the opposite Other observations are positive and may produce
many different outcomes (Verbeek 2000) Each tobit equation uses a set of identical
explanatory variables that proxy factors which could possibly be associated with firmrsquos
financing choices including industry and country dummies
We also considered the bias caused by potential interdependence between the choice of
whether to invest and firmrsquos financing choices We accounted for the potential selection bias
by introducing into the financial choices SURE Tobit equations (second stage outcome
equations14) the inverse Millrsquos ratio calculated based on modelling the choice to invest in
fixed assets (first stage or selection equation) To identify the first stage of the Heckman
selection model we chose a variable which is correlated with the first stage dependent
variable (investment decision) but not with the second ones (financing choices) We used the
rate of capacity utilization as part of our identification strategy Capacity utilization shows the
percentage of capital stock in use the higher is the rate the more likely firms will increase
investment Batyaeva and Aukutsionek (2001) show that the rate of capacity utilization is
higher in the group of investing firms than in the group of non-investing firms in Russia15 We
calculated the inverse Millrsquos ratio based on the above selection equation16 and included it as
a control in the second stage SURE Tobit equations The inverse Millrsquos ratio has only proved
to be statistically significant in the private bank loan equation pointing to the potential
selection bias arising from the possibility that the factors determining the decision to invest
might differ from those determining the use of bank financing in purchasing fixed assets
14 We also attempted to estimate an investment equation jointly with Tobit financial choices equations within the SURE framework using However given the overall complexity of the model we failed to do this We proceeded further with a two-stage approach by estimating an investment probit equation and calculating the inverse Millrsquos ratio that we add into the outcome financial choices equations at the second stage of the analysis to test for the selection bias 15 We performed an independent sample t-test to check whether the rate of capacity utilization is statistically significantly higher for investing firms compared to non-investing firms for our sample The null hypothesis of no difference was rejected at 1 level of significance 16 To economize on space we do not report the results of the investment probit equation but they are available from authorsrsquo upon request
18
Finally In Table 6 we attempt to condition the determinants of financing constraints
declared by SMEs on the relative percentage increase of trade credit in total funds used for
real investment As mentioned above in Section 2 the timings of measuring the composition
of financing sources precede by a year the timings of measuring the perceptions of financing
constraints That feature of the BEEPSrsquo design allays a likely concern about the endogeneity
of the relative proportion of trade credit and enables causal inference We too report in thre
note to Table 4 the adjusted marginal effects for the interaction term of the SME dummy with
the trade credit variable
In the next section we discuss our empirical results
5 Empirical Results
Table 3 reports the results of the probit model with the marginal effects for firmsrsquo
perception of financial constraints while Tables 4-5 summarize the results of SURE tobits for
a more detailed breakdown of five financing choices More specifically Table 4 reports the
results based on the whole sample to give a comparative perspective on SMErsquos financing
strategy vis-a-vis large businesses whereas Table 5 reports the results based on a
subsample of small and medium-sized firms to shed some light on their financing choices in
the period of crisis
Perception of financial constraints
Table 3 shows that generally small and medium-sized enterprises feel more financially
constrained with the coefficient for SME dummy in relation to the large firms being positive
and significant which is consistent with our discussion in sections 2-3 However the
coefficient of the interaction term with the Crisis dummy turns out to be negative and
significant in relation to the perception of financial constraints as a major obstacle and it
tends to outweigh the effect of a SME dummy when we calculate marginal effects The effect
of the interaction terms with the crisis remains robust after we adjust for non-linearity using
the framework proposed by Norton Wang and Ai (2004)17 Overall these results confirm
that small and medium-sized enterprises are much less financially constrained during the
crisis years with their perceptions close to those of the large firms This result is a polar
opposite to that obtained for the SMEs in the UK (Fraser 2009) which finds that not only do
SMEs generally feel more financially constrained but they report to be even more so during
17 We also check the robustness of our results to the potential problem of multicollinearity between a crisis dummy and its interaction term with SME by splitting a sample and testing the same specification separately for SMEs and large firms We also perform another robustness check by breaking a SME dummy into three subsequent dummies namely micro- small- and medium-sized firms The difference in perception of financial constraints gets almost eliminated in the case of small firms and is largely reduced in the case of micro firms whereas it is less so for medium-sized firms
19
the last crisis We could explain this striking difference by the peculiarities of the SMEs
functioning in new emerging economies The lower reliance of SMEs on external debt in
good times (as shown by results which are discussed below) gives SMEs some flexibility
during the crisis when formal financial markets dry up Jointly with overall flexibility to make
necessary cost cuts and to restructure a business this overall lower reliance on external
funding and the use of alternative sources of financing makes SMEs feel less financially
constrained under the crisis as compared to larger firms
We also find that a more developed financial sector as proxied by domestic private
credit as proportion of GDP helps ease up financial constraints This is in line with the
general literature suggesting that better functioning financial intermediaries facilitate the risk
amelioration in the presence of problems created by market frictions (Levine 1997 Barth et
al 2006 Barth et al 2008)
Unfortunately we fail to find any significant effect of the property rights protection on
firmsrsquo perception of financial constraints that may be explained by the fact that the effect of a
more developed financial sector is likely to outweigh the effect of the property rights
protection
Finally we also find that foreign ownership and international product certificate may
reduce firmsrsquo borrowing constraints while any pressure from domestic or foreign competition
so is pressure from the customers to innovate will increase firmrsquos perception of financial
constraints as major given that firms envisage the need to secure external funding for RampD
or any other innovation-related activities
Financing choices for investment in fixed assets
The results in Table 4 indicate that small enterprises tend to rely more on internal funds
and less on bank loans but they are no different from larger firms in respect of using informal
funds trade credit or private equity which is generally consistent with our discussion in
Sections 2 and 3 The results of Table 5 suggest however that under crisis small and
medium-sized firms tend to switch to other sources of finance such as trade credit and
ownerrsquos contributed equity and to respectively reduce the reliance on retained earnings
perhaps because they decrease due to the negative impact of crisis internal funds With
regards to our discussion of SMEsrsquo risk management we note that the use of private equity
(ownerrsquos contribution) during the crisis years increases which could indicate that the ownerrsquos
funds are used as a cushion in the period of financial distress
An interesting insight regarding the use of trade credit emerges for SMEs in our
sample although in non-crisis years small and medium-sized businesses are not significantly
different from larger firms in terms of reliance on trade credit SMEs tend to finance a
significantly higher proportion of their fixed asset investment by trade credit than large firms
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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From China Journal of Comparative Economics 37 471-490
Lizal L and J Svejnar 2002 Investment credit rationing and the soft budget constraint
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Love I 2003 Financial development and financing constraints International evidence from
the structural investment model Review of Financial Studies 16(3) pp 765-79
Love I and R Zaidi 2010 Trade Credit Bank Credit and Financial Crisis International
Review of Finance 10(1) 125-147 March
Mateut S S Bougheas and P Mizen 2006 Trade credit bank lending and monetary
policy transmission European Economic Review 50(3) 603-629
Matthews C H and S G Scott1995 Uncertainty and Planning in Small and
Entrepreneurial Firms An Empirical Assessment Journal of Small Business management
23(4) 34-52
Meltzer A H 1960 Mercantile Credit Monetary Policy and Size of Firms The Review of
Economics and Statistics 42 (4 ) (Nov 1960) 429-437
Mitra P amp Muravyev A amp M Schaffer 2008 Convergence in Institutions and Market
Outcomes Cross-Country and Time-Series Evidence from the BEEPS Surveys in Transition
Economies IZA Discussion Papers 3863 Institute for the Study of Labor (IZA)
Modigliani F and MH Miller 1958 The Cost of Capital Corporation Finance and the
Theory of Investment American Economic Review 48(3) pp 261-97
Nielsen J H 2002 Trade Credit and the Bank Lending Channel Journal of Money Credit
and Banking 34 226-253
Nivorozhkin E 2005 Financing Choices of Firms in EU Accession Countries Emerging
Markets Review 6 138-169
Norton E Wang H and C Ai 2004 Computing Interaction Effects in Logit and Probit
Models The Stata Journal 4(2) 103-116
Petersen M A and R G Rajan 1997 Trade Credit Theory and Evidence Review of
Financial Studies 10 661ndash691
27
Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
No 33
Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
Small- and Medium-sized Businesses in Central and Eastern Europe Journal of Business
Venturing 14 519-539
Pissarides F 2001 Financial Structure to Promote Private Sector Development in South-
Eastern Europe EBRD Working Paper No 64
Pissarides F M Singer and J Svejnar 2003 Objectives and Constraints of Entrepreneurs
Evidence from Small and Medium Size Enterprises in Russia and Bulgaria Journal of
Comparative Economics 31 503-531
Radygin A D A E Gontmakher M G Kuzyk I V Mezheraup H Swain Yu V
Simachiov N A Shmeleva and R M Entov 2005 The institution of Bankruptcy
Development Problems Areas of Reforming Consortium for Economic Policy Research and
Advice Moscow 2005
Ravid S and M Spiegel 1997 Optimal Financing Contracts for a Start-up with Unlimited
Operating Discretion Journal of Financial and Quantitative Analysis 32 269-86
Rostowski J ed 1995 Banking reform in Central Europe and the Soviet Union Budapest
Central University Press
Rehman Shafiq 2011 The Effect of Financial Crisis on the Behaviour of Trade Credit A
Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
Roodman D 2009 Estimating Fully Observed Recursive Mixed-Process Models with cmp CGD Working Paper 168 Washington DC Center for Global Development Sprenger C 2002 ldquoOwnership and Corporate Governance in Russian Industry a Surveyrdquo
EBRD Working Paper No70
Stijn Claessens and Konstantinos Tzioumis 2006 Measuring firmsrsquo access to finance
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Taketa G and K Udell 2007 Lending Channels and Financial Shocks The Case of Small
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November
Tornell A and F Westermann 2005 Boom-Bust Cycles and Financial Liberalization
Cambridge MA MIT Press
Verbeek M (2000) A Guide to Modern Econometrics John Wiley amp Sons New York
28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
Challenging Environments Journal of Small Business Management 49(1) 107-125
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International University of Manchester DOI httpdxdoiorg105257wbwdi2011-09
Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
4
The required funding was also difficult to raise via bank borrowing given the
underdeveloped and inefficient financial system inherited from the planned economy where
the role of finance was passive for finance served as a monetary counterpart of planning
directives Despite the emergence of new private banks the competition in the banking
sector across the region remained low which can partly be explained by the capital
weakness of new banks making the market very segmented The dominance of state-owned
or (partly) privatised commercial banks made the banking environment very concentrated
with these banks expressing preference for large state-owned or privatised enterprises at the
cost of discouraging new entrants (Rostowski 1995 Berglof and Bolton 2002) A number of
newly established banks did not have enough experience in private sector lending
(Pissarides 1998) and in the situation of a great economic uncertainty preferred occupying
some niches to riskier lending to the real sector in particular to SMEs Such niches for
example included foreign currency transactions short-term lending on the inter-bank market
and operations with governmental securities (Korosteleva and Lawson 2010) Other new
banks so-called lsquopocket banksrsquo were mainly established by privatised larger enterprises to
serve the purpose of financing their own activities bringing to the surface the problem of
connected lending Given all these peculiarities of banksrsquo establishment at the start of
transition small de novo firms were severely restricted in their access to the formal credit
market The situation was aggravated further by the credit crunch that was a result of
macroeconomic stabilisation measures taken by transition governments to curb inflation
High nominal interest rates were a far larger problem for new ventures which typically face
an initial period of negative profitability1
The progress in reforming the financial sector was slow This is confirmed by the EBRD
annual transition indicators measuring the progress in reforms They include (1) the banking
reform and interest rate liberalisation and (2) the securities market and non-bank financial
institutions For those two the average scores for the region reached only 24 and 21
respectively on the scale from 1 (little progress) to 43 (developed market economies
standards) the decade after the transition began In 2009 only the Central and Eastern
European countries (CEECs) which joined the EU scored as high as 4 in both areas of
financial institutional reforms with Latvia Lithuania Slovakia Slovenia Bulgaria and
Romania still being one score down in the area of securities markets The latter three
countries also scored lower than their CEE counterparts in the area of banking sector reform
Some CIS countries such as Belarus Turkmenistan and Uzbekistan viewed as the laggards
in transition still have rankings as low as 1 (Turkmenistan) and 2 (Azerbaijan
1 Pissarides (1998) argues that SMEs often reinforce banksrsquo perceptions of them being unreliable borrowers given frequent under-reporting of profits due to tax avoidance purposes or failure to register ownership of assets prompting lenders to penalise SMEs by charging them higher premium
5
BelarusKyrgyzstan Tajikistan and Uzbekistan) in both areas of the financial institutional
reforms Overall after the years of the financial sector reform the majority of transition
economies still have rather shallow domestic credit systems (Figure 1) and relatively
underdeveloped capital markets with market capitalisation ratio varying from as low as 16
per cent of GDP in Kyrgyzstan and Armenia2 to as high as 40-50 per cent in Croatia amp
Kazakhstan respectively in 2009 with Montenegro and Russia standing out compared with
the rest of the region3
Figures 1 amp 2 to be inserted here
A number of empirical studies further confirm that financial constraints in transition
economies constitute one of the main obstacles for start-up entry and growth (Pissarides
1998 1999 2001 Pissarides et al 2003 Klapper et al 2002) Pissarides (2001) concludes
that lack of access to finance is more binding for SMEs than larger businesses with the
severity of this constraint being stronger in South-East Europe compared to other transition
economies including the Commonwealth of Independent States (CIS) In their study of SME
growth in Russia and Bulgaria Pissarides et al (2003) find that financial constraints hamper
SME growth and that SMEs resort to the use of internal funds to overcome constraints on
external finance This is similar to Johnsonrsquos et al (2002) findings suggesting that internal
finance can substitute for external finance (see also Lizal and Svejnar (2002) for similar
conclusions) Pissarides et al (2003) also show that financial constraints affect SMEs more
than barriers related to property rights issues Drawing on the data on 15 Eastern European
countries Klapper et al (2002) show that financial constraints affect SMEs longer-term ability
to grow Finally Gorodnichenko and Schnitzer (2010) show that financial constraints restrain
the ability of domestically-owned firms to innovate and export thus inhibiting productivity
growth They also argue that this negative effect is magnified due to financial constraints
forcing export and innovation activities to become substitutes whereas they are commonly
found to be complements
We complement these studies with the most recent empirical evidence on the
determinants of SMEsrsquo perception of financial constrains in transition economies which
comes from the 2002-09 BEEPS dataset The BEEPS self-reported measure of financing
constraints unites in one termed lsquoaccess to financersquo metric both quantity and price
constraints In the surveys firms were directly asked to indicate the extent to which access to
2 In fact it goes as low as 02 per cent of GDP in Uzbekistan in 2005 following the World Development Indicators data with no data reported for subsequent years 3 Montenegro and Russia emerge as outliers given their far higher ratios of market capitalisation These are 104 and 70 per cent respectively and they are far above of some West European countriesrsquo ratios including Germany and comparable to the ones in China and USA
6
finance was an obstacle to their operations and the averages for the individual countries in
the dataset are shown in Figure 3 With exception of Bosnia and Uzbekistan4 SMEs in all
transition economies are more financially constrained than larger firms although as our
empirical results show (see Section 5) the difference in perception of financial constraints
has been largely eliminated between smaller and larger firms during the recent global
financial crisis
Figure 3 to be inserted here
It has previously been argued that a low reliance on outside financing scarce use of
equity finance5 and low level of inter-firm trade financing is a common feature of small firms
across the transition region of Europe and Central Asia (Klapper et al 2002 Pissarides
1998 2001) Furthermore Klapperrsquos et al (2002) find almost no use of long-term debt
attributing this to the underdevelopment of the banking sector weak collateral law and poor
credit information registries Their evidence also shows virtually zero reliance of SMEs
across the 15 Eastern European countries on trade credit with the exception of Hungary and
to a lesser extent of the Czech Republic Poland and Romania They explain this by
insufficiency of partner firmsrsquo internal funds or their inability to access external borrowings to
become able to finance extension of trade credit Low reliance on trade credit may be also
attributed to low foreign presence in some countries of the region as multinationals could
extend trade credit to local firms including SMEs (Klapper et al2002)
Figure 4 shows the relative importance of financing sources used for purchase of fixed
assets by SMEs in the transition economies The data underlying this figure are the relative
percentages of the financing sources firms used in the year preceding a BEEPS survey year
in the BEEPS 2002-2009 surveys The surveys group financing sources into the following six
types internal funds or retained earnings ownersrsquo contribution or issued new equity shares
[funds] borrowed from private banks [funds] borrowed from state-owned banks purchases
on credit from suppliers and advances from customers and other (moneylenders friends
relatives non-banking financial institutions) Figure 4 suggests that SMEs in the transition
economies tend to largely rely on their internal funds or retained profits in funding their
investment Only about 23 per cent of small and medium-sized firms rely on borrowing from
private banks Trade credit and equity finance occupy similar shares in funding SMErsquos
investment decisions and account for the mere 9 per cent of total purchase of fixed assets
4 In Bosnia amp Uzbekistan larger firms are marginally more constrained than smaller ones (at 10 percent level of significance) 5 Small firms may also decide to limit their issuance of outside equity to avoid reduction in control of their firms (Scherr et al1990 and Hamilton and Fox 1998 cited in Klapper et al 2002)
7
According to Cull (2007) trade credit can be seen as substitute for loans for private firmsrsquo
trading partners that are shut out of financial credit market Other sources include borrowing
from informal money lenders and family and these emerge as the third important source of
funding SMEsrsquo investment after internal funds and bank credit We expect the informal
finance to be mostly comprised of equity provided by family and friends as funding obtained
from informal private money lenders was overly expensive with the premium standing at least
20 percentage points above that charged by local intermediaries (Pissarides 1998)
Figure 4 to be inserted here
In conclusion we note that the number of studies of the financing decisions of small
and medium-sized enterprises in emerging markets and in particular in the former centrally
planned economies or previously heavily regulated economies such as India has been rather
limited (see eg Nivorozhkin 2005 Delcoure 2007 Crnigoj 2007 Chakraborty 2008
Girma et al 2008 Li et al 2009 Correa et al 2010 Love and Zaidi 2010) We contribute to
this literature by analysing for SMEs in these countries the determinants of the following five
financing options retained earnings private loan (loan finance from private banks) trade
credit private equity (ownersrsquo equity) and informal finance In this study the phrase lsquoinformal
financersquo is an umbrella term that helps condense in one category funds from moneylenders
friends relatives non-banking financial institutions Our results allow us to shed more light
on whether and how the theories of financing choices apply to transition countries in the
credit crunch environment
The following section discusses theories pertaining to small firm financing and how this
may be affected by a financial crisis
3 Small Firm Financing and the Effect of Crisis Theoretical Considerations and
Hypotheses
31 Theoretical arguments
When analysing financing choices of SMEs we first turn to the two cornerstone
theories of explaining leverage the trade-off theory and the pecking order hypothesis (POH)
While the former states that firms may prefer debt to equity in the presence of corporate tax
subject to the costs of potential financial distress stemming from borrowing large amounts
(Modigliani and Miller 1958) the latter suggests that the firms first finance their investment
out of retained earnings as this is the cheapest and the most readily available alternative
then out of debt and lastly via issuing equity which is seen as the most expensive option to
8
the firm (Arnold 2008) More recent literature on firm financing started to look closer at and
emphasize the importance of other sources such as trade credit especially for the small and
medium firms using mostly the data on developed economies For instance Berger amp Udell
(1998) stress the importance of trade credit to the short-term financing of small firms Bevan
and Danbolt (2002) estimate that trade credit account for 62 per cent of total liabilities of UK
firms
The role of trade credit has been seen by some researchers as a substitute of bank
lending for liquidity-constrained firms (Cull 2007) such as SMEs One of the benefits of trade
credit compared to the bank lending is that it allows to partly get around the information
asymmetry problem between the lender and the borrowing SME as business partners would
have more information about the ability of the borrower to repay and about such reputation of
the borrower in the industry Meltzer (1960) Nielsen (2002) and Petersen and Rajan (1997)
argue that trade credit may also provide a means of alternative financing under the tight
monetary conditions such as credit crunches when financial institutions are less able or
willing to provide loans to SMEs In support of this hypothesis Atanasova and Wilson (2003
2004) and Mateut et al (2006) find that under tight monetary conditions firms tend to
substitute bank loans with trade credit However the findings in Bernanke and Gertler (1995)
and Gertler and Gilchrist (1993) do not agree with this hypothesis In line with these authors
Taketa and Udell (2007) using a sample of Japanese SMEs after the crisis years find that
bank lending and trade credit are complements rather than substitutes Love and Zaidi
(2010) report that the use of trade credit by East Asian firms has declined after the 1998
financial crisis together with the use of bank loans Finally interesting enough there is
some empirical evidence which suggests that in the context of transition economies there
may be a higher reliance of SMEs on trade credit in the period of crisis More specifically
focusing on the panel of 1686 firms in Bulgaria Hungary Latvia Lithuania Romania and
Turkey in 2007 and 2009 Klapper and Randall (2010) find that during periods of contractions
in bank credit buyers might depend more on trade credit (although primarily to be used for
short-term financing) that may be particularly true for small firms This provides some support
for the hypothesis that the two sources of finance namely bank loans and trade credit in the
context of transition and emerging economies can be seen as substitutes in period of crisis
Another source of firm financing that has recently received increased attention is
private equity Private equity consists of investments by private individual investors or firms
(business angels investments funds) as well as business ownersrsquo contributions to their
equity The lsquobusiness angelsrsquo type of private equity is currently on the rise in the developed
countries as well as emerging markets such as India Brazil China Malaysia However
ownersrsquo contribution is a far more widespread type of private equity in countries under
consideration Generally SMEs are prone to various types of business and financial risks
9
and it would be very important for them to try and hedge against these risks Zou and Adams
(2008) look at the effect of property insurance on the public firmsrsquo borrowing capacity in
China while Matthews and Scott (1995) in the US and Herbane (2011) in the UK investigate
the types of risk management used by the SMEs The findings point to a rather limited use by
the small and medium-sized enterprises of the risk management assessment and hedging
techniques
In the emerging markets of the post-Soviet bloc the use of risk management techniques
such as hedging with financial derivatives is virtually non-existent However an informal risk
management practice of accumulating cash out of profits and also of using informal lending
from family and friends to serve as a cushion in the times of financial distress as protection
against possible bankruptcy and as an instrument of insurance against risks has been one
way of accounting for the risky nature of SMEs in these countries Secondly many SMEs
sometimes use bankruptcy when they find themselves in the situation of financial distress
and then open a new firm without losing much of their personal assets (Radygin et al 2005)
These SMEs are oftentimes are registered as belonging to a relative or the SMEs could be
registered as founded by an artificially created third party with no links to the actual ownerrsquos
personal assets Recently banks in the new emerging economies such as Russia started a
practice of compulsory purchase of loan insurance if the SME is to take a loan from the bank
This serves as a risk insurance mechanism to a certain extent at the same time however
increasing the cost of bank financing However more recently this practice has attracted the
attention of the Federal Antimonopoly Service that ruled that there is evidence of collusion
between banks and insurance companies Overall we could conclude that the use of risk
management practices is very narrow and of a rather informal nature
The next sub-section explores in greater detail the institutional context of financing in the
situation of economic crisis
Empirical studies on small firm financing in the years of crisis are primarily motivated by
the informational asymmetries theories One of the most important contributions in the study
of the role of SMEs during business cycle has been the real business cycle (RBC) theory
(Bernanke and Gertler 1995 Bernanke Gertler amp Gilchrist 1998) The argument put forward
by the RBC theory is that SMEs face tighter liquidity constraints in terms of external financing
due to higher informational asymmetries associated with their activities the low value of
their assets to serve as collateral the high cost of monitoring small businesses given a small
scale of their investment projects and subsequently the unwillingness of banks to lend to
SMEs
During economic slowdowns when small businesses are even more in need of external
finance bank lending to them diminishes even further which tends to propagate the crisis if
the SMEs then go out of business (see for example Tornell and Westermann 2005) At the
10
same time as larger firms use more finance and tend to rely more on external funding they
may be hit harder by financial contraction in the situation of global crises when international
financial markets dry up so preventing larger firms from drawing upon them when required
They are also less flexible and it is more costly for them to restructure and downsize when
they are hit with external shocks Furthermore while SMEs tend to be more flexible in relying
on other sources of finance including trade credit contributed equity and informal finance
the financial structure of larger firms generally tends to be less diversified with a preference
often given to retained profits and bank finance following the pecking order theory Taken
together we may argue that both supply and demand for finance is more affected for larger
firms in the situation of external shocks
Based on the discussion presented in Sections 2 and 31 we further discuss three main
groups of factors which are likely to affect firmsrsquo perception of financial constraints and their
financing choice strategy These are as follows (1) firm size in general and in the period of
crisis (2) other firm- and industry-specific characteristics including foreign ownership export
orientation firmsrsquo social capital and the degree of competition and its pressure on the firm to
develop a new product and (3) country-level institutional parameters including the degree of
protection of property rights and the development of the financial sector
32 Size of the enterprise and the effect of crisis
With regards to the effect of firm size based on the general discussion in the literature
(see sections 2-31) we expect SMEs to be more financially constrained in their access to
external lending and respectively more reliant on internal funds This is due to insufficient
information that the bank can obtain about a particular SME as well as due to a potentially
lower size of collateral However this lower reliance of SMEs on external debt can potentially
be a source of flexibility during the crisis when formal financial markets dry up and when
even large well-established firms have difficulty obtaining bank credit Furthermore following
Atanasova and Wilson (2003 2004) Mateut et al (2006) and Klapper and Randall (2010) we
expect that under tight monetary conditions SMEs in transition economies are more likely to
switch to alternative forms of financing such as trade credit We also hypothesize that SMEs
are more likely to rely on ownersrsquo contributed equity which they tend to accumulate in good
times as part of their risk management strategy to use it as a cushion in the times of financial
distress In summary we expect the difference between the SMEs and large firms in their
reliance on bank finance to diminish during the crisis years and second SMEs to be more
flexible and rely more on other sources of finance such as trade credit and private equity in
the period of financial contractions
11
33 Firm- and industry- level factors
As far as the firm-level and industry-level variables are concerned we expect the
following results first the level of social capital of a firm as proxied by the inverse of the time
spent dealing with government regulations to indicate possible established connections with
public officials can positively affect its access to trade credit Next the industry-level
pressure on a firm from competitors to develop a new product may increase the firmrsquos
chances of obtaining a bank loan as the bank may perceive the firmrsquos operations as more
diversified and less risky (Isachenkova et al 2011) We also expect foreign competition and
the pressure it exerts on a firm innovation capability to play less important role for firm
financing decisions as SMEs are more likely to operate in market niches and they are
unlikely to compete with multinational enterprises In contrast we expect a pressure
originated from customers on a firm to innovate to increase a firmrsquos probability to rely more
on external sources of funding This may be attributed to the fact that a firm does not only
differentiate itself from other firms further with developing a new product but also assures a
demand for this product by responding to the needs of its existing customers The
guaranteed demand for a new product would be one of the most crucial factors taken into
account by bank managers or potential investors in decision-making concerning project
financing Thirdly international product certification may play a similar role with regards to
bank loans increasing the access to external funds Fourth we investigate the effect on the
choice of financing of the firm age with a square term Generally older firms may have
easier access to bank loans as more information is available about them to the lender (Beck
et al 2006 Canton et al 2010) however due to the particulars of the transition period
sometimes older firms may be less economically viable and unable to get a loan therefore
the sign of this coefficient is uncertain here Lastly we also look at the firmrsquos export
orientation which is expected to increase the reliance on bank lending and its ownership
type where we single out foreign and domestic private firms In the case of foreign firms
they are less likely to use private loans and rely instead on retained earnings and intra-
company funds transfers in the case of MNCs
34 Institutional environment
The impact of institutional variables on the financing choices of firms has been of the
utmost interest to economists and policy-makers during the period of transition (see for
example Stijn and Tzioumis 2006 Mitra et al 2008 see also Commander and Svejnar
(2009) for an in-depth and comprehensive analysis of the impact of various business
environment factors on firm performance using BEEPS 2002 - 2005 panel) In our analysis
12
we concentrate on two institutional factors the degree of protection of property rights and the
size of the formal financial sector which have been claimed to be of key importance for firmsrsquo
financing decisions (see Korosteleva and Mickiewicz (2011) for overview of the related
literature) As far as the property rights protection is concerned it is found to play crucial role
for firm growth and access to external finance (Aidis et al 2008 2010 Korosteleva and
Mickiewicz 2011 Estrin Korosteleva and Mickiewicz 2011) In the environment with weak
protection of property rights financial contracts are less likely to be concluded leading to the
underdevelopment of finance and credit rationing with small firms to be disproportionally
affected the most (Acemoglu and Johnson 2005) Beck et al (2004) show that in terms of
access to external finance small firms benefit disproportionally from higher levels of property
rights protection Lack of secure property rights may also discourage SMEs from taking full
advantage of opportunities to invest (Johnson et al 2002) In a survey of private small
manufacturing firms in Poland Russia Ukraine Romania and Slovakia Johnson et al
(2002) find that small firms tend to reinvest less of their earnings when they perceive their
property rights insecure They also find that the effect of the property rights system is of more
paramount importance for entrepreneursrsquo decisions to reinvest their earnings than availability
of formal finance Moreover if property rights are well-protected this lessens the extent of
potential threat of being expropriated by raidersbank lenders in an artificial bankruptcy
procedure which has been quite a significant issue for firms in Russia and other FSU states
(Radygin et al 2005 Sprenger 2002) Based on this we expect that strong property rights
are likely to encourage SMEs to use more debt as well as to use their own funds and
retained profits for investing in investment projects
With regards to the size of the formal finance as measured by the share of private
credit to GDP the relationship between financial depth and financial constraints has been
extensively studied (Beck et al 2006 also see for example Love 2003 who employing a
sample of 36 countries finds that financial development affects firmsrsquo investment by
increasing the availability of external finance) Financial intermediaries facilitate the risk
amelioration in the presence of problems created by information and transaction frictions by
developing expertise in risk assessment and in monitoring (Levine 1997 Barth et al 2006
Barth et al 2008) Developed financial institutions are found to be particularly beneficial for
small firms compared to large ones (Barth et al 2006 Beck et al 2005 2006 2008)
Pissarides et al (2003) show that financial constraints affect SMEs even more than
deficiency of the property rights protection Accordingly the size of the formal financial
system is expected to be positively related to the use of bank finance as a better functioning
financial system should help ease up borrowing constraints
4 Data and Methodology
13
41 Sample
To explore the determinants of the financial structure of small businesses we use the
2002-2009 Business Environment and Enterprise Performance Survey (BEEPS) data6 of
21867 firms covering 26 transition economies of Europe and Central Asia (ECA)7
The sample is primarily comprised of small and medium-sized businesses8 which
account for 893 per cent of the sample The sample is representative in terms of industrial
coverage with the majority of SMEs of the sample operating in manufacturing wholesale
and retailing industries
BEEPS dataset provides rich information on firm characteristics investment
behaviour and firmsrsquo perception of business environment including financial constraints
which are of a primary interest for our investigation of the effect of the recent financial crisis
on firmsrsquo perception of financial constraints Potentially we could use other micro-level data
characterising various domains of business environment captured by firmsrsquo perceptions for
investigating the effects of the institutional settings However using these micro-level
indicators as explanatory variables would make our study plagued with a problem of
endogeneity To avoid this we merge our firm-level data with country-level indicators
characterising various institutional domains The country level data were obtained from the
World Development Indicators (World Bank) and Polity IV databases (for further discussion
see below) Finally the BEEPs dataset contains other useful information which allows us to
shed light of the effect of for example social capital as proxied by the indirect measure of
possible connections with the authorities (see below for the definition of the variable) on firm
financing
42 Variable Definition and Measurement
Explanatory variables
6 This data is a joint project of the European Bank for Reconstruction and Development and World Bank The first survey was launched in 1999 The dataset used in the present study is an unbalanced panel covering the years of 2002 2005 2007-2009 7 The sample includes the following countries Albania Armenia Azerbaijan Belarus Bosnia Bulgaria Croatia Czech Republic Estonia FYROM Georgia Hungary Kazakhstan Kyrgyzstan Latvia Lithuania Moldova Montenegro Poland Romania Russia Serbia Slovakia Slovenia Tajikistan and Ukraine We exclude Uzbekistan as an outlier from our sample We also exclude Turkey as it is not classified as a post-communist country undertaking transition from a planned to a market economy 8 We utilize the EU employment criterion to define small and medium-sized businesses More specifically businesses are defined as micro if they employ 9 and less employees small ndash between 10 and 49 medium ndash between 50 and 249 and large ndash over 250 employees Respectively SMEs are defined as firms employing less than 249 firms
14
To test our main hypothesis of the effect of a firm size on firmsrsquo perception of financial
constraints we introduce a dummy variable denoting small and medium-sized business
coded as 1 if firms are classified as small or medium-sized businesses according to the EU
definition based on the employment criterion For robustness of our results we also use a
continuous variable denoting a size of employment as measured by the natural logarithm of
employment9 The obtained results are consistent with the ones using the SME indicators
To capture the effect of the recent financial crisis we introduce a crisis dummy coded
as 1 if the year of survey is equal to 2008 or 200910
We also introduce a number of firm-level controls which include age of firm11 type of
ownership including private and foreign ownership export orientation and whether a firm
has an internationally certified product all equal to 1 if a business has a respectively listed
characteristic and zero otherwise We also examine the effect of various sources of pressure
on firms to innovate ndash the indicators which are considered to be important for firm investment
decisions Respectively the pressure for innovation may stem from domestic competition
foreign competition and customers To capture the effect of a firmrsquos social capital we
introduce an indicator which indirectly may capture some possible connections of a firm with
authorities It is proxied by time spent by each firm on dealing with government regulations
We assume the less time firms spend dealing with government regulations the more likely
they have some established connections with public officials which allow them to avoid
burdensome regulation procedures
In our study we also introduce a number of country-level variables which characterize
the institutional environment in the countries covered by our sample More specifically we
include an indicator of the financial development as measured by the ratio of domestic credit
to private sector to GDP (one year lag to avoid potential endogeneity) obtained from the
World Bank World Development Indicators (World Bank 2011) This measure has been used
in previous studies (Klapper et al 2006) and it is expected to be of a primary importance for
transition economies where firms tend to rely more on bank finance rather than capital
markets We also introduce a measure of property rights protection (a one year lag) proxied
by the indicator of effective constraints imposed on the executive branch of the government
and obtained from Polity IV project12 This measure of property rights protection is
9 These results are not reported here to save some space However they can be obtained from authors upon request 10 Here it is important to note that although the financial crisis has started in 2007 in the USA it spread to transition economies in 2008-2009 11 Some studies find a non-monotonic relationship between age and firm decision-making In this study we introduce a squared term of age along with a age variable to capture this possible non-linearity 12 Available from httpwwwsystemicpeaceorgpolitypolity4htm
15
considered to be superior to other indicators including the index of property rights reported
by the Heritage Foundation ndashWall Street Journal (for further discussion see Acemoglu and
Johnson 2005 Glaeser et al 2004 Estrin Korosteleva and Mickieiwcz 2011)
In the present study we also introduce macroeconomic controls including cyclical
economic performance as measured by the one year lag of the GDP annual growth rate
and the level of economic development as proxied by a set of GDP pc dummies denoting
the five quintiles of its distribution to address the problem of potential multicollinearity with the
measure of financial development
Finally we include industry and country controls in all our specifications Introducing
country dummies into analysis allows to control for cross-country heterogeneity
For further definition of all variables their descriptive statistics and correlation matrix
see Tables 1-2
43 Dependent variables
To investigate the effect of a firmrsquos size on its perception of financial constraints we
construct a dummy variable coded as 1 capturing a major and very severe obstacle for
access to finance and 0 otherwise
The firm financing choices are defined by the five individual dependent variables
associated with tobit financial choice equations in the seemingly unrelated regression
equations model
One important thing to mention here is the inability to distinguish between
owninternal funds and external private equity considered as one of the limitations of the
2002-2009 BEEPS dataset In the period under investigation BEEPS offers two questions
which aim to capture the use of equity The first one centres around retained earnings and
the second one shows ownersrsquo contributions and private equity or issued new equity
Following some theoretical considerations discussed in sections 2 and 3 in the context of
SMEs we expect the second element of equity to be primarily comprised of existing ownersrsquo
new contributions rather than private equity
Thus the indicator of financial choices represents a set of five individual dependent
variables including retained earnings contributed earnings private borrowing informal
finance trade credit with each of them constructed as a share in total financing of SMErsquos
investment decisions (see Table 1)
44 Methods
16
In this study we employ a number of estimators to obtain robust results More
specifically we use a probit model to investigate the effect of a firm size and the recent
financial crisis on firmsrsquo perception of financial constraints The effect of a firm size in the
situation of crisis is captured by the introduction of the interaction term between firm size as
proxied by the SME indicator and a financial crisis dummy
We further employ the seemingly unrelated regression equations model combined
with the tobit approach for studying firmsrsquo financial structure
Probit model of perception of financial constraints
In the probit model the probability of a firmrsquos perception of financial constraints as
major(j = 1) can be written as follows
( ) ( )int ++
++
infinminus
minus===
ijitj uXjitiitit ijitjuXjy uX
βα βαππ 212-
)()(2 21exp|Pr
Where ity is our measure of financial constraints as perceived by firms and itX is a
set of our explanatory variables discussed in detail in sections 3-4 Here it is important to
note that the interaction term in a probit model cannot be interpreted in a similar way as in
linear models and disregarding this may lead to misleading estimates of the interaction
effect which is of crucial importance for our study (Norton Wang and Ai 2004) Respectively
for robustness of our results here we follow the framework suggested by Norton Wang and
Ai (2004) to account for the model nonlinearity The adjusted marginal effects for the
interaction term are reported in the note to Table 313
Simultaneous Model of Financing Choices
As mentioned above we next model the choice of all five financing choices explicitly
We also hypothesise (following Isachenkova et al 2011) that firm financing choices are likely
to be determined jointly A standard way of modelling jointly determined indicators is a
system of equations - SURE ndash seemingly unrelated regression equations where equations
are linked only by their errors (Zellner 1962) We therefore model the five types of sources of
finance (internal funds private bank borrowing informal finance trade credit and private
13 We also run a probit regression for a split sample of (1) SMEs and (2) large firms to check the robustness of our results (based on the interaction term) while addressing a problem of multicollinearity between a crisis variable and its interaction term with a SME variable The correlation coefficient between a crisis variable and its interaction term with a SME variable is equal to 93 This can be attributed by the problem of a sample being overrepresented by SMEs which constitute 90 of all surveyed firms The results remain robust and can be available from authors upon request
17
equity) using a SURE framework within which we specify a set of five tobit regressions with
correlated residuals
We employ the STATA cmp module which allows to it Seemingly Unrelated Regressions
using the simulated likelihood method such as the Geweke Hajivassiliou and Keane (GHK)
algorithm (for further discussion see Roodman 2008) We utilise a tobit equation to model
each individual financial choice of firms because our dependent financing choices variables
are continuous but their range is constrained (censored) with a substantial number of
observations either equal to zero denoting those who do not use the respective source of
finance or to 100 showing the opposite Other observations are positive and may produce
many different outcomes (Verbeek 2000) Each tobit equation uses a set of identical
explanatory variables that proxy factors which could possibly be associated with firmrsquos
financing choices including industry and country dummies
We also considered the bias caused by potential interdependence between the choice of
whether to invest and firmrsquos financing choices We accounted for the potential selection bias
by introducing into the financial choices SURE Tobit equations (second stage outcome
equations14) the inverse Millrsquos ratio calculated based on modelling the choice to invest in
fixed assets (first stage or selection equation) To identify the first stage of the Heckman
selection model we chose a variable which is correlated with the first stage dependent
variable (investment decision) but not with the second ones (financing choices) We used the
rate of capacity utilization as part of our identification strategy Capacity utilization shows the
percentage of capital stock in use the higher is the rate the more likely firms will increase
investment Batyaeva and Aukutsionek (2001) show that the rate of capacity utilization is
higher in the group of investing firms than in the group of non-investing firms in Russia15 We
calculated the inverse Millrsquos ratio based on the above selection equation16 and included it as
a control in the second stage SURE Tobit equations The inverse Millrsquos ratio has only proved
to be statistically significant in the private bank loan equation pointing to the potential
selection bias arising from the possibility that the factors determining the decision to invest
might differ from those determining the use of bank financing in purchasing fixed assets
14 We also attempted to estimate an investment equation jointly with Tobit financial choices equations within the SURE framework using However given the overall complexity of the model we failed to do this We proceeded further with a two-stage approach by estimating an investment probit equation and calculating the inverse Millrsquos ratio that we add into the outcome financial choices equations at the second stage of the analysis to test for the selection bias 15 We performed an independent sample t-test to check whether the rate of capacity utilization is statistically significantly higher for investing firms compared to non-investing firms for our sample The null hypothesis of no difference was rejected at 1 level of significance 16 To economize on space we do not report the results of the investment probit equation but they are available from authorsrsquo upon request
18
Finally In Table 6 we attempt to condition the determinants of financing constraints
declared by SMEs on the relative percentage increase of trade credit in total funds used for
real investment As mentioned above in Section 2 the timings of measuring the composition
of financing sources precede by a year the timings of measuring the perceptions of financing
constraints That feature of the BEEPSrsquo design allays a likely concern about the endogeneity
of the relative proportion of trade credit and enables causal inference We too report in thre
note to Table 4 the adjusted marginal effects for the interaction term of the SME dummy with
the trade credit variable
In the next section we discuss our empirical results
5 Empirical Results
Table 3 reports the results of the probit model with the marginal effects for firmsrsquo
perception of financial constraints while Tables 4-5 summarize the results of SURE tobits for
a more detailed breakdown of five financing choices More specifically Table 4 reports the
results based on the whole sample to give a comparative perspective on SMErsquos financing
strategy vis-a-vis large businesses whereas Table 5 reports the results based on a
subsample of small and medium-sized firms to shed some light on their financing choices in
the period of crisis
Perception of financial constraints
Table 3 shows that generally small and medium-sized enterprises feel more financially
constrained with the coefficient for SME dummy in relation to the large firms being positive
and significant which is consistent with our discussion in sections 2-3 However the
coefficient of the interaction term with the Crisis dummy turns out to be negative and
significant in relation to the perception of financial constraints as a major obstacle and it
tends to outweigh the effect of a SME dummy when we calculate marginal effects The effect
of the interaction terms with the crisis remains robust after we adjust for non-linearity using
the framework proposed by Norton Wang and Ai (2004)17 Overall these results confirm
that small and medium-sized enterprises are much less financially constrained during the
crisis years with their perceptions close to those of the large firms This result is a polar
opposite to that obtained for the SMEs in the UK (Fraser 2009) which finds that not only do
SMEs generally feel more financially constrained but they report to be even more so during
17 We also check the robustness of our results to the potential problem of multicollinearity between a crisis dummy and its interaction term with SME by splitting a sample and testing the same specification separately for SMEs and large firms We also perform another robustness check by breaking a SME dummy into three subsequent dummies namely micro- small- and medium-sized firms The difference in perception of financial constraints gets almost eliminated in the case of small firms and is largely reduced in the case of micro firms whereas it is less so for medium-sized firms
19
the last crisis We could explain this striking difference by the peculiarities of the SMEs
functioning in new emerging economies The lower reliance of SMEs on external debt in
good times (as shown by results which are discussed below) gives SMEs some flexibility
during the crisis when formal financial markets dry up Jointly with overall flexibility to make
necessary cost cuts and to restructure a business this overall lower reliance on external
funding and the use of alternative sources of financing makes SMEs feel less financially
constrained under the crisis as compared to larger firms
We also find that a more developed financial sector as proxied by domestic private
credit as proportion of GDP helps ease up financial constraints This is in line with the
general literature suggesting that better functioning financial intermediaries facilitate the risk
amelioration in the presence of problems created by market frictions (Levine 1997 Barth et
al 2006 Barth et al 2008)
Unfortunately we fail to find any significant effect of the property rights protection on
firmsrsquo perception of financial constraints that may be explained by the fact that the effect of a
more developed financial sector is likely to outweigh the effect of the property rights
protection
Finally we also find that foreign ownership and international product certificate may
reduce firmsrsquo borrowing constraints while any pressure from domestic or foreign competition
so is pressure from the customers to innovate will increase firmrsquos perception of financial
constraints as major given that firms envisage the need to secure external funding for RampD
or any other innovation-related activities
Financing choices for investment in fixed assets
The results in Table 4 indicate that small enterprises tend to rely more on internal funds
and less on bank loans but they are no different from larger firms in respect of using informal
funds trade credit or private equity which is generally consistent with our discussion in
Sections 2 and 3 The results of Table 5 suggest however that under crisis small and
medium-sized firms tend to switch to other sources of finance such as trade credit and
ownerrsquos contributed equity and to respectively reduce the reliance on retained earnings
perhaps because they decrease due to the negative impact of crisis internal funds With
regards to our discussion of SMEsrsquo risk management we note that the use of private equity
(ownerrsquos contribution) during the crisis years increases which could indicate that the ownerrsquos
funds are used as a cushion in the period of financial distress
An interesting insight regarding the use of trade credit emerges for SMEs in our
sample although in non-crisis years small and medium-sized businesses are not significantly
different from larger firms in terms of reliance on trade credit SMEs tend to finance a
significantly higher proportion of their fixed asset investment by trade credit than large firms
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Arnold G 2008 Corporate Financial Management 4th Edition Prentice Hall
Atanasova and Wilson 2003 Bank Borrowing Constraints and the Demand for Trade Credit
Evidence from Panel Data Managerial and Decision Economics Special Issue The
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Barth J G Caprio and R Levine 2006 Rethinking Bank Regulation Till Angels Govern
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Beck T A Demirguumlccedil-Kunt and V Maksimovic 2004 Financing patterns around the world
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Beck T A Demirguumlccedil-Kunt L Laeven and V Maksimovic (2006) ldquoThe Determinants of
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Beck T A Demirguumlccedil-Kunt and V Maksimovic 2008 ldquoFinancial Patterns Around the World
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Berger A amp G Udell 1998 The Economics of Small Business Finance The Role of
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and Finance 22 613ndash73
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Policy Transmission NBER Working Papers 5146 National Bureau of Economic Research
Inc
Bernanke B M Gertler amp S Gilchrist 1998 The Financial Accelerator in a Quantitative
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Bevan A and J Danbolt 2002 Capital structure and its determinants in the UK - a
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Chakraborty I 2008 Capital Structure in Emerging Stock Market The Case of India
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Performance Review of Economics and Statistics 931 309-337
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Cull R and L C Xu 2007 Formal Finance and Trade Credit during Chinarsquos Transition
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De La Torre AM Peria and S Schmukler 2008 Bank Involvement with SMEs Beyond
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Delcoure N 2007 The Determinants of Capital Structure in Transitional Economies
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International Review of Economics and Finance 16 400-415
Didier T Hevia C and Schmukler SL 2011 How Resilient Were Emerging Economies to the Global Crisis World Bank Policy Research Working Paper No 5637
Estrin S and T Mickiewicz 2010 Entrepreneurship in Transition Economies The Role of
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Fraser S 2009 Small Firms in the Credit Crisis Evidence from the UK Survey of SME Finances Economic and Social Research Council Report Available at httpwww2warwickacukfacsocwbsresearchcsmeresearchlatestsmall_firms_in_the_credit_crisis_v3-oct09pdf Herbane B 2011 Small business research Time for a crisis-based view International Small
Business Journal 28(1)43ndash64
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Financing in Eastern Europe World Bank Policy Research Working Paper 2933
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27
Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
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28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
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Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
5
BelarusKyrgyzstan Tajikistan and Uzbekistan) in both areas of the financial institutional
reforms Overall after the years of the financial sector reform the majority of transition
economies still have rather shallow domestic credit systems (Figure 1) and relatively
underdeveloped capital markets with market capitalisation ratio varying from as low as 16
per cent of GDP in Kyrgyzstan and Armenia2 to as high as 40-50 per cent in Croatia amp
Kazakhstan respectively in 2009 with Montenegro and Russia standing out compared with
the rest of the region3
Figures 1 amp 2 to be inserted here
A number of empirical studies further confirm that financial constraints in transition
economies constitute one of the main obstacles for start-up entry and growth (Pissarides
1998 1999 2001 Pissarides et al 2003 Klapper et al 2002) Pissarides (2001) concludes
that lack of access to finance is more binding for SMEs than larger businesses with the
severity of this constraint being stronger in South-East Europe compared to other transition
economies including the Commonwealth of Independent States (CIS) In their study of SME
growth in Russia and Bulgaria Pissarides et al (2003) find that financial constraints hamper
SME growth and that SMEs resort to the use of internal funds to overcome constraints on
external finance This is similar to Johnsonrsquos et al (2002) findings suggesting that internal
finance can substitute for external finance (see also Lizal and Svejnar (2002) for similar
conclusions) Pissarides et al (2003) also show that financial constraints affect SMEs more
than barriers related to property rights issues Drawing on the data on 15 Eastern European
countries Klapper et al (2002) show that financial constraints affect SMEs longer-term ability
to grow Finally Gorodnichenko and Schnitzer (2010) show that financial constraints restrain
the ability of domestically-owned firms to innovate and export thus inhibiting productivity
growth They also argue that this negative effect is magnified due to financial constraints
forcing export and innovation activities to become substitutes whereas they are commonly
found to be complements
We complement these studies with the most recent empirical evidence on the
determinants of SMEsrsquo perception of financial constrains in transition economies which
comes from the 2002-09 BEEPS dataset The BEEPS self-reported measure of financing
constraints unites in one termed lsquoaccess to financersquo metric both quantity and price
constraints In the surveys firms were directly asked to indicate the extent to which access to
2 In fact it goes as low as 02 per cent of GDP in Uzbekistan in 2005 following the World Development Indicators data with no data reported for subsequent years 3 Montenegro and Russia emerge as outliers given their far higher ratios of market capitalisation These are 104 and 70 per cent respectively and they are far above of some West European countriesrsquo ratios including Germany and comparable to the ones in China and USA
6
finance was an obstacle to their operations and the averages for the individual countries in
the dataset are shown in Figure 3 With exception of Bosnia and Uzbekistan4 SMEs in all
transition economies are more financially constrained than larger firms although as our
empirical results show (see Section 5) the difference in perception of financial constraints
has been largely eliminated between smaller and larger firms during the recent global
financial crisis
Figure 3 to be inserted here
It has previously been argued that a low reliance on outside financing scarce use of
equity finance5 and low level of inter-firm trade financing is a common feature of small firms
across the transition region of Europe and Central Asia (Klapper et al 2002 Pissarides
1998 2001) Furthermore Klapperrsquos et al (2002) find almost no use of long-term debt
attributing this to the underdevelopment of the banking sector weak collateral law and poor
credit information registries Their evidence also shows virtually zero reliance of SMEs
across the 15 Eastern European countries on trade credit with the exception of Hungary and
to a lesser extent of the Czech Republic Poland and Romania They explain this by
insufficiency of partner firmsrsquo internal funds or their inability to access external borrowings to
become able to finance extension of trade credit Low reliance on trade credit may be also
attributed to low foreign presence in some countries of the region as multinationals could
extend trade credit to local firms including SMEs (Klapper et al2002)
Figure 4 shows the relative importance of financing sources used for purchase of fixed
assets by SMEs in the transition economies The data underlying this figure are the relative
percentages of the financing sources firms used in the year preceding a BEEPS survey year
in the BEEPS 2002-2009 surveys The surveys group financing sources into the following six
types internal funds or retained earnings ownersrsquo contribution or issued new equity shares
[funds] borrowed from private banks [funds] borrowed from state-owned banks purchases
on credit from suppliers and advances from customers and other (moneylenders friends
relatives non-banking financial institutions) Figure 4 suggests that SMEs in the transition
economies tend to largely rely on their internal funds or retained profits in funding their
investment Only about 23 per cent of small and medium-sized firms rely on borrowing from
private banks Trade credit and equity finance occupy similar shares in funding SMErsquos
investment decisions and account for the mere 9 per cent of total purchase of fixed assets
4 In Bosnia amp Uzbekistan larger firms are marginally more constrained than smaller ones (at 10 percent level of significance) 5 Small firms may also decide to limit their issuance of outside equity to avoid reduction in control of their firms (Scherr et al1990 and Hamilton and Fox 1998 cited in Klapper et al 2002)
7
According to Cull (2007) trade credit can be seen as substitute for loans for private firmsrsquo
trading partners that are shut out of financial credit market Other sources include borrowing
from informal money lenders and family and these emerge as the third important source of
funding SMEsrsquo investment after internal funds and bank credit We expect the informal
finance to be mostly comprised of equity provided by family and friends as funding obtained
from informal private money lenders was overly expensive with the premium standing at least
20 percentage points above that charged by local intermediaries (Pissarides 1998)
Figure 4 to be inserted here
In conclusion we note that the number of studies of the financing decisions of small
and medium-sized enterprises in emerging markets and in particular in the former centrally
planned economies or previously heavily regulated economies such as India has been rather
limited (see eg Nivorozhkin 2005 Delcoure 2007 Crnigoj 2007 Chakraborty 2008
Girma et al 2008 Li et al 2009 Correa et al 2010 Love and Zaidi 2010) We contribute to
this literature by analysing for SMEs in these countries the determinants of the following five
financing options retained earnings private loan (loan finance from private banks) trade
credit private equity (ownersrsquo equity) and informal finance In this study the phrase lsquoinformal
financersquo is an umbrella term that helps condense in one category funds from moneylenders
friends relatives non-banking financial institutions Our results allow us to shed more light
on whether and how the theories of financing choices apply to transition countries in the
credit crunch environment
The following section discusses theories pertaining to small firm financing and how this
may be affected by a financial crisis
3 Small Firm Financing and the Effect of Crisis Theoretical Considerations and
Hypotheses
31 Theoretical arguments
When analysing financing choices of SMEs we first turn to the two cornerstone
theories of explaining leverage the trade-off theory and the pecking order hypothesis (POH)
While the former states that firms may prefer debt to equity in the presence of corporate tax
subject to the costs of potential financial distress stemming from borrowing large amounts
(Modigliani and Miller 1958) the latter suggests that the firms first finance their investment
out of retained earnings as this is the cheapest and the most readily available alternative
then out of debt and lastly via issuing equity which is seen as the most expensive option to
8
the firm (Arnold 2008) More recent literature on firm financing started to look closer at and
emphasize the importance of other sources such as trade credit especially for the small and
medium firms using mostly the data on developed economies For instance Berger amp Udell
(1998) stress the importance of trade credit to the short-term financing of small firms Bevan
and Danbolt (2002) estimate that trade credit account for 62 per cent of total liabilities of UK
firms
The role of trade credit has been seen by some researchers as a substitute of bank
lending for liquidity-constrained firms (Cull 2007) such as SMEs One of the benefits of trade
credit compared to the bank lending is that it allows to partly get around the information
asymmetry problem between the lender and the borrowing SME as business partners would
have more information about the ability of the borrower to repay and about such reputation of
the borrower in the industry Meltzer (1960) Nielsen (2002) and Petersen and Rajan (1997)
argue that trade credit may also provide a means of alternative financing under the tight
monetary conditions such as credit crunches when financial institutions are less able or
willing to provide loans to SMEs In support of this hypothesis Atanasova and Wilson (2003
2004) and Mateut et al (2006) find that under tight monetary conditions firms tend to
substitute bank loans with trade credit However the findings in Bernanke and Gertler (1995)
and Gertler and Gilchrist (1993) do not agree with this hypothesis In line with these authors
Taketa and Udell (2007) using a sample of Japanese SMEs after the crisis years find that
bank lending and trade credit are complements rather than substitutes Love and Zaidi
(2010) report that the use of trade credit by East Asian firms has declined after the 1998
financial crisis together with the use of bank loans Finally interesting enough there is
some empirical evidence which suggests that in the context of transition economies there
may be a higher reliance of SMEs on trade credit in the period of crisis More specifically
focusing on the panel of 1686 firms in Bulgaria Hungary Latvia Lithuania Romania and
Turkey in 2007 and 2009 Klapper and Randall (2010) find that during periods of contractions
in bank credit buyers might depend more on trade credit (although primarily to be used for
short-term financing) that may be particularly true for small firms This provides some support
for the hypothesis that the two sources of finance namely bank loans and trade credit in the
context of transition and emerging economies can be seen as substitutes in period of crisis
Another source of firm financing that has recently received increased attention is
private equity Private equity consists of investments by private individual investors or firms
(business angels investments funds) as well as business ownersrsquo contributions to their
equity The lsquobusiness angelsrsquo type of private equity is currently on the rise in the developed
countries as well as emerging markets such as India Brazil China Malaysia However
ownersrsquo contribution is a far more widespread type of private equity in countries under
consideration Generally SMEs are prone to various types of business and financial risks
9
and it would be very important for them to try and hedge against these risks Zou and Adams
(2008) look at the effect of property insurance on the public firmsrsquo borrowing capacity in
China while Matthews and Scott (1995) in the US and Herbane (2011) in the UK investigate
the types of risk management used by the SMEs The findings point to a rather limited use by
the small and medium-sized enterprises of the risk management assessment and hedging
techniques
In the emerging markets of the post-Soviet bloc the use of risk management techniques
such as hedging with financial derivatives is virtually non-existent However an informal risk
management practice of accumulating cash out of profits and also of using informal lending
from family and friends to serve as a cushion in the times of financial distress as protection
against possible bankruptcy and as an instrument of insurance against risks has been one
way of accounting for the risky nature of SMEs in these countries Secondly many SMEs
sometimes use bankruptcy when they find themselves in the situation of financial distress
and then open a new firm without losing much of their personal assets (Radygin et al 2005)
These SMEs are oftentimes are registered as belonging to a relative or the SMEs could be
registered as founded by an artificially created third party with no links to the actual ownerrsquos
personal assets Recently banks in the new emerging economies such as Russia started a
practice of compulsory purchase of loan insurance if the SME is to take a loan from the bank
This serves as a risk insurance mechanism to a certain extent at the same time however
increasing the cost of bank financing However more recently this practice has attracted the
attention of the Federal Antimonopoly Service that ruled that there is evidence of collusion
between banks and insurance companies Overall we could conclude that the use of risk
management practices is very narrow and of a rather informal nature
The next sub-section explores in greater detail the institutional context of financing in the
situation of economic crisis
Empirical studies on small firm financing in the years of crisis are primarily motivated by
the informational asymmetries theories One of the most important contributions in the study
of the role of SMEs during business cycle has been the real business cycle (RBC) theory
(Bernanke and Gertler 1995 Bernanke Gertler amp Gilchrist 1998) The argument put forward
by the RBC theory is that SMEs face tighter liquidity constraints in terms of external financing
due to higher informational asymmetries associated with their activities the low value of
their assets to serve as collateral the high cost of monitoring small businesses given a small
scale of their investment projects and subsequently the unwillingness of banks to lend to
SMEs
During economic slowdowns when small businesses are even more in need of external
finance bank lending to them diminishes even further which tends to propagate the crisis if
the SMEs then go out of business (see for example Tornell and Westermann 2005) At the
10
same time as larger firms use more finance and tend to rely more on external funding they
may be hit harder by financial contraction in the situation of global crises when international
financial markets dry up so preventing larger firms from drawing upon them when required
They are also less flexible and it is more costly for them to restructure and downsize when
they are hit with external shocks Furthermore while SMEs tend to be more flexible in relying
on other sources of finance including trade credit contributed equity and informal finance
the financial structure of larger firms generally tends to be less diversified with a preference
often given to retained profits and bank finance following the pecking order theory Taken
together we may argue that both supply and demand for finance is more affected for larger
firms in the situation of external shocks
Based on the discussion presented in Sections 2 and 31 we further discuss three main
groups of factors which are likely to affect firmsrsquo perception of financial constraints and their
financing choice strategy These are as follows (1) firm size in general and in the period of
crisis (2) other firm- and industry-specific characteristics including foreign ownership export
orientation firmsrsquo social capital and the degree of competition and its pressure on the firm to
develop a new product and (3) country-level institutional parameters including the degree of
protection of property rights and the development of the financial sector
32 Size of the enterprise and the effect of crisis
With regards to the effect of firm size based on the general discussion in the literature
(see sections 2-31) we expect SMEs to be more financially constrained in their access to
external lending and respectively more reliant on internal funds This is due to insufficient
information that the bank can obtain about a particular SME as well as due to a potentially
lower size of collateral However this lower reliance of SMEs on external debt can potentially
be a source of flexibility during the crisis when formal financial markets dry up and when
even large well-established firms have difficulty obtaining bank credit Furthermore following
Atanasova and Wilson (2003 2004) Mateut et al (2006) and Klapper and Randall (2010) we
expect that under tight monetary conditions SMEs in transition economies are more likely to
switch to alternative forms of financing such as trade credit We also hypothesize that SMEs
are more likely to rely on ownersrsquo contributed equity which they tend to accumulate in good
times as part of their risk management strategy to use it as a cushion in the times of financial
distress In summary we expect the difference between the SMEs and large firms in their
reliance on bank finance to diminish during the crisis years and second SMEs to be more
flexible and rely more on other sources of finance such as trade credit and private equity in
the period of financial contractions
11
33 Firm- and industry- level factors
As far as the firm-level and industry-level variables are concerned we expect the
following results first the level of social capital of a firm as proxied by the inverse of the time
spent dealing with government regulations to indicate possible established connections with
public officials can positively affect its access to trade credit Next the industry-level
pressure on a firm from competitors to develop a new product may increase the firmrsquos
chances of obtaining a bank loan as the bank may perceive the firmrsquos operations as more
diversified and less risky (Isachenkova et al 2011) We also expect foreign competition and
the pressure it exerts on a firm innovation capability to play less important role for firm
financing decisions as SMEs are more likely to operate in market niches and they are
unlikely to compete with multinational enterprises In contrast we expect a pressure
originated from customers on a firm to innovate to increase a firmrsquos probability to rely more
on external sources of funding This may be attributed to the fact that a firm does not only
differentiate itself from other firms further with developing a new product but also assures a
demand for this product by responding to the needs of its existing customers The
guaranteed demand for a new product would be one of the most crucial factors taken into
account by bank managers or potential investors in decision-making concerning project
financing Thirdly international product certification may play a similar role with regards to
bank loans increasing the access to external funds Fourth we investigate the effect on the
choice of financing of the firm age with a square term Generally older firms may have
easier access to bank loans as more information is available about them to the lender (Beck
et al 2006 Canton et al 2010) however due to the particulars of the transition period
sometimes older firms may be less economically viable and unable to get a loan therefore
the sign of this coefficient is uncertain here Lastly we also look at the firmrsquos export
orientation which is expected to increase the reliance on bank lending and its ownership
type where we single out foreign and domestic private firms In the case of foreign firms
they are less likely to use private loans and rely instead on retained earnings and intra-
company funds transfers in the case of MNCs
34 Institutional environment
The impact of institutional variables on the financing choices of firms has been of the
utmost interest to economists and policy-makers during the period of transition (see for
example Stijn and Tzioumis 2006 Mitra et al 2008 see also Commander and Svejnar
(2009) for an in-depth and comprehensive analysis of the impact of various business
environment factors on firm performance using BEEPS 2002 - 2005 panel) In our analysis
12
we concentrate on two institutional factors the degree of protection of property rights and the
size of the formal financial sector which have been claimed to be of key importance for firmsrsquo
financing decisions (see Korosteleva and Mickiewicz (2011) for overview of the related
literature) As far as the property rights protection is concerned it is found to play crucial role
for firm growth and access to external finance (Aidis et al 2008 2010 Korosteleva and
Mickiewicz 2011 Estrin Korosteleva and Mickiewicz 2011) In the environment with weak
protection of property rights financial contracts are less likely to be concluded leading to the
underdevelopment of finance and credit rationing with small firms to be disproportionally
affected the most (Acemoglu and Johnson 2005) Beck et al (2004) show that in terms of
access to external finance small firms benefit disproportionally from higher levels of property
rights protection Lack of secure property rights may also discourage SMEs from taking full
advantage of opportunities to invest (Johnson et al 2002) In a survey of private small
manufacturing firms in Poland Russia Ukraine Romania and Slovakia Johnson et al
(2002) find that small firms tend to reinvest less of their earnings when they perceive their
property rights insecure They also find that the effect of the property rights system is of more
paramount importance for entrepreneursrsquo decisions to reinvest their earnings than availability
of formal finance Moreover if property rights are well-protected this lessens the extent of
potential threat of being expropriated by raidersbank lenders in an artificial bankruptcy
procedure which has been quite a significant issue for firms in Russia and other FSU states
(Radygin et al 2005 Sprenger 2002) Based on this we expect that strong property rights
are likely to encourage SMEs to use more debt as well as to use their own funds and
retained profits for investing in investment projects
With regards to the size of the formal finance as measured by the share of private
credit to GDP the relationship between financial depth and financial constraints has been
extensively studied (Beck et al 2006 also see for example Love 2003 who employing a
sample of 36 countries finds that financial development affects firmsrsquo investment by
increasing the availability of external finance) Financial intermediaries facilitate the risk
amelioration in the presence of problems created by information and transaction frictions by
developing expertise in risk assessment and in monitoring (Levine 1997 Barth et al 2006
Barth et al 2008) Developed financial institutions are found to be particularly beneficial for
small firms compared to large ones (Barth et al 2006 Beck et al 2005 2006 2008)
Pissarides et al (2003) show that financial constraints affect SMEs even more than
deficiency of the property rights protection Accordingly the size of the formal financial
system is expected to be positively related to the use of bank finance as a better functioning
financial system should help ease up borrowing constraints
4 Data and Methodology
13
41 Sample
To explore the determinants of the financial structure of small businesses we use the
2002-2009 Business Environment and Enterprise Performance Survey (BEEPS) data6 of
21867 firms covering 26 transition economies of Europe and Central Asia (ECA)7
The sample is primarily comprised of small and medium-sized businesses8 which
account for 893 per cent of the sample The sample is representative in terms of industrial
coverage with the majority of SMEs of the sample operating in manufacturing wholesale
and retailing industries
BEEPS dataset provides rich information on firm characteristics investment
behaviour and firmsrsquo perception of business environment including financial constraints
which are of a primary interest for our investigation of the effect of the recent financial crisis
on firmsrsquo perception of financial constraints Potentially we could use other micro-level data
characterising various domains of business environment captured by firmsrsquo perceptions for
investigating the effects of the institutional settings However using these micro-level
indicators as explanatory variables would make our study plagued with a problem of
endogeneity To avoid this we merge our firm-level data with country-level indicators
characterising various institutional domains The country level data were obtained from the
World Development Indicators (World Bank) and Polity IV databases (for further discussion
see below) Finally the BEEPs dataset contains other useful information which allows us to
shed light of the effect of for example social capital as proxied by the indirect measure of
possible connections with the authorities (see below for the definition of the variable) on firm
financing
42 Variable Definition and Measurement
Explanatory variables
6 This data is a joint project of the European Bank for Reconstruction and Development and World Bank The first survey was launched in 1999 The dataset used in the present study is an unbalanced panel covering the years of 2002 2005 2007-2009 7 The sample includes the following countries Albania Armenia Azerbaijan Belarus Bosnia Bulgaria Croatia Czech Republic Estonia FYROM Georgia Hungary Kazakhstan Kyrgyzstan Latvia Lithuania Moldova Montenegro Poland Romania Russia Serbia Slovakia Slovenia Tajikistan and Ukraine We exclude Uzbekistan as an outlier from our sample We also exclude Turkey as it is not classified as a post-communist country undertaking transition from a planned to a market economy 8 We utilize the EU employment criterion to define small and medium-sized businesses More specifically businesses are defined as micro if they employ 9 and less employees small ndash between 10 and 49 medium ndash between 50 and 249 and large ndash over 250 employees Respectively SMEs are defined as firms employing less than 249 firms
14
To test our main hypothesis of the effect of a firm size on firmsrsquo perception of financial
constraints we introduce a dummy variable denoting small and medium-sized business
coded as 1 if firms are classified as small or medium-sized businesses according to the EU
definition based on the employment criterion For robustness of our results we also use a
continuous variable denoting a size of employment as measured by the natural logarithm of
employment9 The obtained results are consistent with the ones using the SME indicators
To capture the effect of the recent financial crisis we introduce a crisis dummy coded
as 1 if the year of survey is equal to 2008 or 200910
We also introduce a number of firm-level controls which include age of firm11 type of
ownership including private and foreign ownership export orientation and whether a firm
has an internationally certified product all equal to 1 if a business has a respectively listed
characteristic and zero otherwise We also examine the effect of various sources of pressure
on firms to innovate ndash the indicators which are considered to be important for firm investment
decisions Respectively the pressure for innovation may stem from domestic competition
foreign competition and customers To capture the effect of a firmrsquos social capital we
introduce an indicator which indirectly may capture some possible connections of a firm with
authorities It is proxied by time spent by each firm on dealing with government regulations
We assume the less time firms spend dealing with government regulations the more likely
they have some established connections with public officials which allow them to avoid
burdensome regulation procedures
In our study we also introduce a number of country-level variables which characterize
the institutional environment in the countries covered by our sample More specifically we
include an indicator of the financial development as measured by the ratio of domestic credit
to private sector to GDP (one year lag to avoid potential endogeneity) obtained from the
World Bank World Development Indicators (World Bank 2011) This measure has been used
in previous studies (Klapper et al 2006) and it is expected to be of a primary importance for
transition economies where firms tend to rely more on bank finance rather than capital
markets We also introduce a measure of property rights protection (a one year lag) proxied
by the indicator of effective constraints imposed on the executive branch of the government
and obtained from Polity IV project12 This measure of property rights protection is
9 These results are not reported here to save some space However they can be obtained from authors upon request 10 Here it is important to note that although the financial crisis has started in 2007 in the USA it spread to transition economies in 2008-2009 11 Some studies find a non-monotonic relationship between age and firm decision-making In this study we introduce a squared term of age along with a age variable to capture this possible non-linearity 12 Available from httpwwwsystemicpeaceorgpolitypolity4htm
15
considered to be superior to other indicators including the index of property rights reported
by the Heritage Foundation ndashWall Street Journal (for further discussion see Acemoglu and
Johnson 2005 Glaeser et al 2004 Estrin Korosteleva and Mickieiwcz 2011)
In the present study we also introduce macroeconomic controls including cyclical
economic performance as measured by the one year lag of the GDP annual growth rate
and the level of economic development as proxied by a set of GDP pc dummies denoting
the five quintiles of its distribution to address the problem of potential multicollinearity with the
measure of financial development
Finally we include industry and country controls in all our specifications Introducing
country dummies into analysis allows to control for cross-country heterogeneity
For further definition of all variables their descriptive statistics and correlation matrix
see Tables 1-2
43 Dependent variables
To investigate the effect of a firmrsquos size on its perception of financial constraints we
construct a dummy variable coded as 1 capturing a major and very severe obstacle for
access to finance and 0 otherwise
The firm financing choices are defined by the five individual dependent variables
associated with tobit financial choice equations in the seemingly unrelated regression
equations model
One important thing to mention here is the inability to distinguish between
owninternal funds and external private equity considered as one of the limitations of the
2002-2009 BEEPS dataset In the period under investigation BEEPS offers two questions
which aim to capture the use of equity The first one centres around retained earnings and
the second one shows ownersrsquo contributions and private equity or issued new equity
Following some theoretical considerations discussed in sections 2 and 3 in the context of
SMEs we expect the second element of equity to be primarily comprised of existing ownersrsquo
new contributions rather than private equity
Thus the indicator of financial choices represents a set of five individual dependent
variables including retained earnings contributed earnings private borrowing informal
finance trade credit with each of them constructed as a share in total financing of SMErsquos
investment decisions (see Table 1)
44 Methods
16
In this study we employ a number of estimators to obtain robust results More
specifically we use a probit model to investigate the effect of a firm size and the recent
financial crisis on firmsrsquo perception of financial constraints The effect of a firm size in the
situation of crisis is captured by the introduction of the interaction term between firm size as
proxied by the SME indicator and a financial crisis dummy
We further employ the seemingly unrelated regression equations model combined
with the tobit approach for studying firmsrsquo financial structure
Probit model of perception of financial constraints
In the probit model the probability of a firmrsquos perception of financial constraints as
major(j = 1) can be written as follows
( ) ( )int ++
++
infinminus
minus===
ijitj uXjitiitit ijitjuXjy uX
βα βαππ 212-
)()(2 21exp|Pr
Where ity is our measure of financial constraints as perceived by firms and itX is a
set of our explanatory variables discussed in detail in sections 3-4 Here it is important to
note that the interaction term in a probit model cannot be interpreted in a similar way as in
linear models and disregarding this may lead to misleading estimates of the interaction
effect which is of crucial importance for our study (Norton Wang and Ai 2004) Respectively
for robustness of our results here we follow the framework suggested by Norton Wang and
Ai (2004) to account for the model nonlinearity The adjusted marginal effects for the
interaction term are reported in the note to Table 313
Simultaneous Model of Financing Choices
As mentioned above we next model the choice of all five financing choices explicitly
We also hypothesise (following Isachenkova et al 2011) that firm financing choices are likely
to be determined jointly A standard way of modelling jointly determined indicators is a
system of equations - SURE ndash seemingly unrelated regression equations where equations
are linked only by their errors (Zellner 1962) We therefore model the five types of sources of
finance (internal funds private bank borrowing informal finance trade credit and private
13 We also run a probit regression for a split sample of (1) SMEs and (2) large firms to check the robustness of our results (based on the interaction term) while addressing a problem of multicollinearity between a crisis variable and its interaction term with a SME variable The correlation coefficient between a crisis variable and its interaction term with a SME variable is equal to 93 This can be attributed by the problem of a sample being overrepresented by SMEs which constitute 90 of all surveyed firms The results remain robust and can be available from authors upon request
17
equity) using a SURE framework within which we specify a set of five tobit regressions with
correlated residuals
We employ the STATA cmp module which allows to it Seemingly Unrelated Regressions
using the simulated likelihood method such as the Geweke Hajivassiliou and Keane (GHK)
algorithm (for further discussion see Roodman 2008) We utilise a tobit equation to model
each individual financial choice of firms because our dependent financing choices variables
are continuous but their range is constrained (censored) with a substantial number of
observations either equal to zero denoting those who do not use the respective source of
finance or to 100 showing the opposite Other observations are positive and may produce
many different outcomes (Verbeek 2000) Each tobit equation uses a set of identical
explanatory variables that proxy factors which could possibly be associated with firmrsquos
financing choices including industry and country dummies
We also considered the bias caused by potential interdependence between the choice of
whether to invest and firmrsquos financing choices We accounted for the potential selection bias
by introducing into the financial choices SURE Tobit equations (second stage outcome
equations14) the inverse Millrsquos ratio calculated based on modelling the choice to invest in
fixed assets (first stage or selection equation) To identify the first stage of the Heckman
selection model we chose a variable which is correlated with the first stage dependent
variable (investment decision) but not with the second ones (financing choices) We used the
rate of capacity utilization as part of our identification strategy Capacity utilization shows the
percentage of capital stock in use the higher is the rate the more likely firms will increase
investment Batyaeva and Aukutsionek (2001) show that the rate of capacity utilization is
higher in the group of investing firms than in the group of non-investing firms in Russia15 We
calculated the inverse Millrsquos ratio based on the above selection equation16 and included it as
a control in the second stage SURE Tobit equations The inverse Millrsquos ratio has only proved
to be statistically significant in the private bank loan equation pointing to the potential
selection bias arising from the possibility that the factors determining the decision to invest
might differ from those determining the use of bank financing in purchasing fixed assets
14 We also attempted to estimate an investment equation jointly with Tobit financial choices equations within the SURE framework using However given the overall complexity of the model we failed to do this We proceeded further with a two-stage approach by estimating an investment probit equation and calculating the inverse Millrsquos ratio that we add into the outcome financial choices equations at the second stage of the analysis to test for the selection bias 15 We performed an independent sample t-test to check whether the rate of capacity utilization is statistically significantly higher for investing firms compared to non-investing firms for our sample The null hypothesis of no difference was rejected at 1 level of significance 16 To economize on space we do not report the results of the investment probit equation but they are available from authorsrsquo upon request
18
Finally In Table 6 we attempt to condition the determinants of financing constraints
declared by SMEs on the relative percentage increase of trade credit in total funds used for
real investment As mentioned above in Section 2 the timings of measuring the composition
of financing sources precede by a year the timings of measuring the perceptions of financing
constraints That feature of the BEEPSrsquo design allays a likely concern about the endogeneity
of the relative proportion of trade credit and enables causal inference We too report in thre
note to Table 4 the adjusted marginal effects for the interaction term of the SME dummy with
the trade credit variable
In the next section we discuss our empirical results
5 Empirical Results
Table 3 reports the results of the probit model with the marginal effects for firmsrsquo
perception of financial constraints while Tables 4-5 summarize the results of SURE tobits for
a more detailed breakdown of five financing choices More specifically Table 4 reports the
results based on the whole sample to give a comparative perspective on SMErsquos financing
strategy vis-a-vis large businesses whereas Table 5 reports the results based on a
subsample of small and medium-sized firms to shed some light on their financing choices in
the period of crisis
Perception of financial constraints
Table 3 shows that generally small and medium-sized enterprises feel more financially
constrained with the coefficient for SME dummy in relation to the large firms being positive
and significant which is consistent with our discussion in sections 2-3 However the
coefficient of the interaction term with the Crisis dummy turns out to be negative and
significant in relation to the perception of financial constraints as a major obstacle and it
tends to outweigh the effect of a SME dummy when we calculate marginal effects The effect
of the interaction terms with the crisis remains robust after we adjust for non-linearity using
the framework proposed by Norton Wang and Ai (2004)17 Overall these results confirm
that small and medium-sized enterprises are much less financially constrained during the
crisis years with their perceptions close to those of the large firms This result is a polar
opposite to that obtained for the SMEs in the UK (Fraser 2009) which finds that not only do
SMEs generally feel more financially constrained but they report to be even more so during
17 We also check the robustness of our results to the potential problem of multicollinearity between a crisis dummy and its interaction term with SME by splitting a sample and testing the same specification separately for SMEs and large firms We also perform another robustness check by breaking a SME dummy into three subsequent dummies namely micro- small- and medium-sized firms The difference in perception of financial constraints gets almost eliminated in the case of small firms and is largely reduced in the case of micro firms whereas it is less so for medium-sized firms
19
the last crisis We could explain this striking difference by the peculiarities of the SMEs
functioning in new emerging economies The lower reliance of SMEs on external debt in
good times (as shown by results which are discussed below) gives SMEs some flexibility
during the crisis when formal financial markets dry up Jointly with overall flexibility to make
necessary cost cuts and to restructure a business this overall lower reliance on external
funding and the use of alternative sources of financing makes SMEs feel less financially
constrained under the crisis as compared to larger firms
We also find that a more developed financial sector as proxied by domestic private
credit as proportion of GDP helps ease up financial constraints This is in line with the
general literature suggesting that better functioning financial intermediaries facilitate the risk
amelioration in the presence of problems created by market frictions (Levine 1997 Barth et
al 2006 Barth et al 2008)
Unfortunately we fail to find any significant effect of the property rights protection on
firmsrsquo perception of financial constraints that may be explained by the fact that the effect of a
more developed financial sector is likely to outweigh the effect of the property rights
protection
Finally we also find that foreign ownership and international product certificate may
reduce firmsrsquo borrowing constraints while any pressure from domestic or foreign competition
so is pressure from the customers to innovate will increase firmrsquos perception of financial
constraints as major given that firms envisage the need to secure external funding for RampD
or any other innovation-related activities
Financing choices for investment in fixed assets
The results in Table 4 indicate that small enterprises tend to rely more on internal funds
and less on bank loans but they are no different from larger firms in respect of using informal
funds trade credit or private equity which is generally consistent with our discussion in
Sections 2 and 3 The results of Table 5 suggest however that under crisis small and
medium-sized firms tend to switch to other sources of finance such as trade credit and
ownerrsquos contributed equity and to respectively reduce the reliance on retained earnings
perhaps because they decrease due to the negative impact of crisis internal funds With
regards to our discussion of SMEsrsquo risk management we note that the use of private equity
(ownerrsquos contribution) during the crisis years increases which could indicate that the ownerrsquos
funds are used as a cushion in the period of financial distress
An interesting insight regarding the use of trade credit emerges for SMEs in our
sample although in non-crisis years small and medium-sized businesses are not significantly
different from larger firms in terms of reliance on trade credit SMEs tend to finance a
significantly higher proportion of their fixed asset investment by trade credit than large firms
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Atanasova and Wilson 2003 Bank Borrowing Constraints and the Demand for Trade Credit
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Beck T A Demirguumlccedil-Kunt L Laeven and V Maksimovic (2006) ldquoThe Determinants of
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Berger A amp G Udell 1998 The Economics of Small Business Finance The Role of
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Delcoure N 2007 The Determinants of Capital Structure in Transitional Economies
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Business Journal 28(1)43ndash64
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Financing in Eastern Europe World Bank Policy Research Working Paper 2933
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of Economic Literature 35 (June) 688-726
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Economics and Statistics 42 (4 ) (Nov 1960) 429-437
Mitra P amp Muravyev A amp M Schaffer 2008 Convergence in Institutions and Market
Outcomes Cross-Country and Time-Series Evidence from the BEEPS Surveys in Transition
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Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
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Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
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Simachiov N A Shmeleva and R M Entov 2005 The institution of Bankruptcy
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Rehman Shafiq 2011 The Effect of Financial Crisis on the Behaviour of Trade Credit A
Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
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Stijn Claessens and Konstantinos Tzioumis 2006 Measuring firmsrsquo access to finance
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Verbeek M (2000) A Guide to Modern Econometrics John Wiley amp Sons New York
28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
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and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
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Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
6
finance was an obstacle to their operations and the averages for the individual countries in
the dataset are shown in Figure 3 With exception of Bosnia and Uzbekistan4 SMEs in all
transition economies are more financially constrained than larger firms although as our
empirical results show (see Section 5) the difference in perception of financial constraints
has been largely eliminated between smaller and larger firms during the recent global
financial crisis
Figure 3 to be inserted here
It has previously been argued that a low reliance on outside financing scarce use of
equity finance5 and low level of inter-firm trade financing is a common feature of small firms
across the transition region of Europe and Central Asia (Klapper et al 2002 Pissarides
1998 2001) Furthermore Klapperrsquos et al (2002) find almost no use of long-term debt
attributing this to the underdevelopment of the banking sector weak collateral law and poor
credit information registries Their evidence also shows virtually zero reliance of SMEs
across the 15 Eastern European countries on trade credit with the exception of Hungary and
to a lesser extent of the Czech Republic Poland and Romania They explain this by
insufficiency of partner firmsrsquo internal funds or their inability to access external borrowings to
become able to finance extension of trade credit Low reliance on trade credit may be also
attributed to low foreign presence in some countries of the region as multinationals could
extend trade credit to local firms including SMEs (Klapper et al2002)
Figure 4 shows the relative importance of financing sources used for purchase of fixed
assets by SMEs in the transition economies The data underlying this figure are the relative
percentages of the financing sources firms used in the year preceding a BEEPS survey year
in the BEEPS 2002-2009 surveys The surveys group financing sources into the following six
types internal funds or retained earnings ownersrsquo contribution or issued new equity shares
[funds] borrowed from private banks [funds] borrowed from state-owned banks purchases
on credit from suppliers and advances from customers and other (moneylenders friends
relatives non-banking financial institutions) Figure 4 suggests that SMEs in the transition
economies tend to largely rely on their internal funds or retained profits in funding their
investment Only about 23 per cent of small and medium-sized firms rely on borrowing from
private banks Trade credit and equity finance occupy similar shares in funding SMErsquos
investment decisions and account for the mere 9 per cent of total purchase of fixed assets
4 In Bosnia amp Uzbekistan larger firms are marginally more constrained than smaller ones (at 10 percent level of significance) 5 Small firms may also decide to limit their issuance of outside equity to avoid reduction in control of their firms (Scherr et al1990 and Hamilton and Fox 1998 cited in Klapper et al 2002)
7
According to Cull (2007) trade credit can be seen as substitute for loans for private firmsrsquo
trading partners that are shut out of financial credit market Other sources include borrowing
from informal money lenders and family and these emerge as the third important source of
funding SMEsrsquo investment after internal funds and bank credit We expect the informal
finance to be mostly comprised of equity provided by family and friends as funding obtained
from informal private money lenders was overly expensive with the premium standing at least
20 percentage points above that charged by local intermediaries (Pissarides 1998)
Figure 4 to be inserted here
In conclusion we note that the number of studies of the financing decisions of small
and medium-sized enterprises in emerging markets and in particular in the former centrally
planned economies or previously heavily regulated economies such as India has been rather
limited (see eg Nivorozhkin 2005 Delcoure 2007 Crnigoj 2007 Chakraborty 2008
Girma et al 2008 Li et al 2009 Correa et al 2010 Love and Zaidi 2010) We contribute to
this literature by analysing for SMEs in these countries the determinants of the following five
financing options retained earnings private loan (loan finance from private banks) trade
credit private equity (ownersrsquo equity) and informal finance In this study the phrase lsquoinformal
financersquo is an umbrella term that helps condense in one category funds from moneylenders
friends relatives non-banking financial institutions Our results allow us to shed more light
on whether and how the theories of financing choices apply to transition countries in the
credit crunch environment
The following section discusses theories pertaining to small firm financing and how this
may be affected by a financial crisis
3 Small Firm Financing and the Effect of Crisis Theoretical Considerations and
Hypotheses
31 Theoretical arguments
When analysing financing choices of SMEs we first turn to the two cornerstone
theories of explaining leverage the trade-off theory and the pecking order hypothesis (POH)
While the former states that firms may prefer debt to equity in the presence of corporate tax
subject to the costs of potential financial distress stemming from borrowing large amounts
(Modigliani and Miller 1958) the latter suggests that the firms first finance their investment
out of retained earnings as this is the cheapest and the most readily available alternative
then out of debt and lastly via issuing equity which is seen as the most expensive option to
8
the firm (Arnold 2008) More recent literature on firm financing started to look closer at and
emphasize the importance of other sources such as trade credit especially for the small and
medium firms using mostly the data on developed economies For instance Berger amp Udell
(1998) stress the importance of trade credit to the short-term financing of small firms Bevan
and Danbolt (2002) estimate that trade credit account for 62 per cent of total liabilities of UK
firms
The role of trade credit has been seen by some researchers as a substitute of bank
lending for liquidity-constrained firms (Cull 2007) such as SMEs One of the benefits of trade
credit compared to the bank lending is that it allows to partly get around the information
asymmetry problem between the lender and the borrowing SME as business partners would
have more information about the ability of the borrower to repay and about such reputation of
the borrower in the industry Meltzer (1960) Nielsen (2002) and Petersen and Rajan (1997)
argue that trade credit may also provide a means of alternative financing under the tight
monetary conditions such as credit crunches when financial institutions are less able or
willing to provide loans to SMEs In support of this hypothesis Atanasova and Wilson (2003
2004) and Mateut et al (2006) find that under tight monetary conditions firms tend to
substitute bank loans with trade credit However the findings in Bernanke and Gertler (1995)
and Gertler and Gilchrist (1993) do not agree with this hypothesis In line with these authors
Taketa and Udell (2007) using a sample of Japanese SMEs after the crisis years find that
bank lending and trade credit are complements rather than substitutes Love and Zaidi
(2010) report that the use of trade credit by East Asian firms has declined after the 1998
financial crisis together with the use of bank loans Finally interesting enough there is
some empirical evidence which suggests that in the context of transition economies there
may be a higher reliance of SMEs on trade credit in the period of crisis More specifically
focusing on the panel of 1686 firms in Bulgaria Hungary Latvia Lithuania Romania and
Turkey in 2007 and 2009 Klapper and Randall (2010) find that during periods of contractions
in bank credit buyers might depend more on trade credit (although primarily to be used for
short-term financing) that may be particularly true for small firms This provides some support
for the hypothesis that the two sources of finance namely bank loans and trade credit in the
context of transition and emerging economies can be seen as substitutes in period of crisis
Another source of firm financing that has recently received increased attention is
private equity Private equity consists of investments by private individual investors or firms
(business angels investments funds) as well as business ownersrsquo contributions to their
equity The lsquobusiness angelsrsquo type of private equity is currently on the rise in the developed
countries as well as emerging markets such as India Brazil China Malaysia However
ownersrsquo contribution is a far more widespread type of private equity in countries under
consideration Generally SMEs are prone to various types of business and financial risks
9
and it would be very important for them to try and hedge against these risks Zou and Adams
(2008) look at the effect of property insurance on the public firmsrsquo borrowing capacity in
China while Matthews and Scott (1995) in the US and Herbane (2011) in the UK investigate
the types of risk management used by the SMEs The findings point to a rather limited use by
the small and medium-sized enterprises of the risk management assessment and hedging
techniques
In the emerging markets of the post-Soviet bloc the use of risk management techniques
such as hedging with financial derivatives is virtually non-existent However an informal risk
management practice of accumulating cash out of profits and also of using informal lending
from family and friends to serve as a cushion in the times of financial distress as protection
against possible bankruptcy and as an instrument of insurance against risks has been one
way of accounting for the risky nature of SMEs in these countries Secondly many SMEs
sometimes use bankruptcy when they find themselves in the situation of financial distress
and then open a new firm without losing much of their personal assets (Radygin et al 2005)
These SMEs are oftentimes are registered as belonging to a relative or the SMEs could be
registered as founded by an artificially created third party with no links to the actual ownerrsquos
personal assets Recently banks in the new emerging economies such as Russia started a
practice of compulsory purchase of loan insurance if the SME is to take a loan from the bank
This serves as a risk insurance mechanism to a certain extent at the same time however
increasing the cost of bank financing However more recently this practice has attracted the
attention of the Federal Antimonopoly Service that ruled that there is evidence of collusion
between banks and insurance companies Overall we could conclude that the use of risk
management practices is very narrow and of a rather informal nature
The next sub-section explores in greater detail the institutional context of financing in the
situation of economic crisis
Empirical studies on small firm financing in the years of crisis are primarily motivated by
the informational asymmetries theories One of the most important contributions in the study
of the role of SMEs during business cycle has been the real business cycle (RBC) theory
(Bernanke and Gertler 1995 Bernanke Gertler amp Gilchrist 1998) The argument put forward
by the RBC theory is that SMEs face tighter liquidity constraints in terms of external financing
due to higher informational asymmetries associated with their activities the low value of
their assets to serve as collateral the high cost of monitoring small businesses given a small
scale of their investment projects and subsequently the unwillingness of banks to lend to
SMEs
During economic slowdowns when small businesses are even more in need of external
finance bank lending to them diminishes even further which tends to propagate the crisis if
the SMEs then go out of business (see for example Tornell and Westermann 2005) At the
10
same time as larger firms use more finance and tend to rely more on external funding they
may be hit harder by financial contraction in the situation of global crises when international
financial markets dry up so preventing larger firms from drawing upon them when required
They are also less flexible and it is more costly for them to restructure and downsize when
they are hit with external shocks Furthermore while SMEs tend to be more flexible in relying
on other sources of finance including trade credit contributed equity and informal finance
the financial structure of larger firms generally tends to be less diversified with a preference
often given to retained profits and bank finance following the pecking order theory Taken
together we may argue that both supply and demand for finance is more affected for larger
firms in the situation of external shocks
Based on the discussion presented in Sections 2 and 31 we further discuss three main
groups of factors which are likely to affect firmsrsquo perception of financial constraints and their
financing choice strategy These are as follows (1) firm size in general and in the period of
crisis (2) other firm- and industry-specific characteristics including foreign ownership export
orientation firmsrsquo social capital and the degree of competition and its pressure on the firm to
develop a new product and (3) country-level institutional parameters including the degree of
protection of property rights and the development of the financial sector
32 Size of the enterprise and the effect of crisis
With regards to the effect of firm size based on the general discussion in the literature
(see sections 2-31) we expect SMEs to be more financially constrained in their access to
external lending and respectively more reliant on internal funds This is due to insufficient
information that the bank can obtain about a particular SME as well as due to a potentially
lower size of collateral However this lower reliance of SMEs on external debt can potentially
be a source of flexibility during the crisis when formal financial markets dry up and when
even large well-established firms have difficulty obtaining bank credit Furthermore following
Atanasova and Wilson (2003 2004) Mateut et al (2006) and Klapper and Randall (2010) we
expect that under tight monetary conditions SMEs in transition economies are more likely to
switch to alternative forms of financing such as trade credit We also hypothesize that SMEs
are more likely to rely on ownersrsquo contributed equity which they tend to accumulate in good
times as part of their risk management strategy to use it as a cushion in the times of financial
distress In summary we expect the difference between the SMEs and large firms in their
reliance on bank finance to diminish during the crisis years and second SMEs to be more
flexible and rely more on other sources of finance such as trade credit and private equity in
the period of financial contractions
11
33 Firm- and industry- level factors
As far as the firm-level and industry-level variables are concerned we expect the
following results first the level of social capital of a firm as proxied by the inverse of the time
spent dealing with government regulations to indicate possible established connections with
public officials can positively affect its access to trade credit Next the industry-level
pressure on a firm from competitors to develop a new product may increase the firmrsquos
chances of obtaining a bank loan as the bank may perceive the firmrsquos operations as more
diversified and less risky (Isachenkova et al 2011) We also expect foreign competition and
the pressure it exerts on a firm innovation capability to play less important role for firm
financing decisions as SMEs are more likely to operate in market niches and they are
unlikely to compete with multinational enterprises In contrast we expect a pressure
originated from customers on a firm to innovate to increase a firmrsquos probability to rely more
on external sources of funding This may be attributed to the fact that a firm does not only
differentiate itself from other firms further with developing a new product but also assures a
demand for this product by responding to the needs of its existing customers The
guaranteed demand for a new product would be one of the most crucial factors taken into
account by bank managers or potential investors in decision-making concerning project
financing Thirdly international product certification may play a similar role with regards to
bank loans increasing the access to external funds Fourth we investigate the effect on the
choice of financing of the firm age with a square term Generally older firms may have
easier access to bank loans as more information is available about them to the lender (Beck
et al 2006 Canton et al 2010) however due to the particulars of the transition period
sometimes older firms may be less economically viable and unable to get a loan therefore
the sign of this coefficient is uncertain here Lastly we also look at the firmrsquos export
orientation which is expected to increase the reliance on bank lending and its ownership
type where we single out foreign and domestic private firms In the case of foreign firms
they are less likely to use private loans and rely instead on retained earnings and intra-
company funds transfers in the case of MNCs
34 Institutional environment
The impact of institutional variables on the financing choices of firms has been of the
utmost interest to economists and policy-makers during the period of transition (see for
example Stijn and Tzioumis 2006 Mitra et al 2008 see also Commander and Svejnar
(2009) for an in-depth and comprehensive analysis of the impact of various business
environment factors on firm performance using BEEPS 2002 - 2005 panel) In our analysis
12
we concentrate on two institutional factors the degree of protection of property rights and the
size of the formal financial sector which have been claimed to be of key importance for firmsrsquo
financing decisions (see Korosteleva and Mickiewicz (2011) for overview of the related
literature) As far as the property rights protection is concerned it is found to play crucial role
for firm growth and access to external finance (Aidis et al 2008 2010 Korosteleva and
Mickiewicz 2011 Estrin Korosteleva and Mickiewicz 2011) In the environment with weak
protection of property rights financial contracts are less likely to be concluded leading to the
underdevelopment of finance and credit rationing with small firms to be disproportionally
affected the most (Acemoglu and Johnson 2005) Beck et al (2004) show that in terms of
access to external finance small firms benefit disproportionally from higher levels of property
rights protection Lack of secure property rights may also discourage SMEs from taking full
advantage of opportunities to invest (Johnson et al 2002) In a survey of private small
manufacturing firms in Poland Russia Ukraine Romania and Slovakia Johnson et al
(2002) find that small firms tend to reinvest less of their earnings when they perceive their
property rights insecure They also find that the effect of the property rights system is of more
paramount importance for entrepreneursrsquo decisions to reinvest their earnings than availability
of formal finance Moreover if property rights are well-protected this lessens the extent of
potential threat of being expropriated by raidersbank lenders in an artificial bankruptcy
procedure which has been quite a significant issue for firms in Russia and other FSU states
(Radygin et al 2005 Sprenger 2002) Based on this we expect that strong property rights
are likely to encourage SMEs to use more debt as well as to use their own funds and
retained profits for investing in investment projects
With regards to the size of the formal finance as measured by the share of private
credit to GDP the relationship between financial depth and financial constraints has been
extensively studied (Beck et al 2006 also see for example Love 2003 who employing a
sample of 36 countries finds that financial development affects firmsrsquo investment by
increasing the availability of external finance) Financial intermediaries facilitate the risk
amelioration in the presence of problems created by information and transaction frictions by
developing expertise in risk assessment and in monitoring (Levine 1997 Barth et al 2006
Barth et al 2008) Developed financial institutions are found to be particularly beneficial for
small firms compared to large ones (Barth et al 2006 Beck et al 2005 2006 2008)
Pissarides et al (2003) show that financial constraints affect SMEs even more than
deficiency of the property rights protection Accordingly the size of the formal financial
system is expected to be positively related to the use of bank finance as a better functioning
financial system should help ease up borrowing constraints
4 Data and Methodology
13
41 Sample
To explore the determinants of the financial structure of small businesses we use the
2002-2009 Business Environment and Enterprise Performance Survey (BEEPS) data6 of
21867 firms covering 26 transition economies of Europe and Central Asia (ECA)7
The sample is primarily comprised of small and medium-sized businesses8 which
account for 893 per cent of the sample The sample is representative in terms of industrial
coverage with the majority of SMEs of the sample operating in manufacturing wholesale
and retailing industries
BEEPS dataset provides rich information on firm characteristics investment
behaviour and firmsrsquo perception of business environment including financial constraints
which are of a primary interest for our investigation of the effect of the recent financial crisis
on firmsrsquo perception of financial constraints Potentially we could use other micro-level data
characterising various domains of business environment captured by firmsrsquo perceptions for
investigating the effects of the institutional settings However using these micro-level
indicators as explanatory variables would make our study plagued with a problem of
endogeneity To avoid this we merge our firm-level data with country-level indicators
characterising various institutional domains The country level data were obtained from the
World Development Indicators (World Bank) and Polity IV databases (for further discussion
see below) Finally the BEEPs dataset contains other useful information which allows us to
shed light of the effect of for example social capital as proxied by the indirect measure of
possible connections with the authorities (see below for the definition of the variable) on firm
financing
42 Variable Definition and Measurement
Explanatory variables
6 This data is a joint project of the European Bank for Reconstruction and Development and World Bank The first survey was launched in 1999 The dataset used in the present study is an unbalanced panel covering the years of 2002 2005 2007-2009 7 The sample includes the following countries Albania Armenia Azerbaijan Belarus Bosnia Bulgaria Croatia Czech Republic Estonia FYROM Georgia Hungary Kazakhstan Kyrgyzstan Latvia Lithuania Moldova Montenegro Poland Romania Russia Serbia Slovakia Slovenia Tajikistan and Ukraine We exclude Uzbekistan as an outlier from our sample We also exclude Turkey as it is not classified as a post-communist country undertaking transition from a planned to a market economy 8 We utilize the EU employment criterion to define small and medium-sized businesses More specifically businesses are defined as micro if they employ 9 and less employees small ndash between 10 and 49 medium ndash between 50 and 249 and large ndash over 250 employees Respectively SMEs are defined as firms employing less than 249 firms
14
To test our main hypothesis of the effect of a firm size on firmsrsquo perception of financial
constraints we introduce a dummy variable denoting small and medium-sized business
coded as 1 if firms are classified as small or medium-sized businesses according to the EU
definition based on the employment criterion For robustness of our results we also use a
continuous variable denoting a size of employment as measured by the natural logarithm of
employment9 The obtained results are consistent with the ones using the SME indicators
To capture the effect of the recent financial crisis we introduce a crisis dummy coded
as 1 if the year of survey is equal to 2008 or 200910
We also introduce a number of firm-level controls which include age of firm11 type of
ownership including private and foreign ownership export orientation and whether a firm
has an internationally certified product all equal to 1 if a business has a respectively listed
characteristic and zero otherwise We also examine the effect of various sources of pressure
on firms to innovate ndash the indicators which are considered to be important for firm investment
decisions Respectively the pressure for innovation may stem from domestic competition
foreign competition and customers To capture the effect of a firmrsquos social capital we
introduce an indicator which indirectly may capture some possible connections of a firm with
authorities It is proxied by time spent by each firm on dealing with government regulations
We assume the less time firms spend dealing with government regulations the more likely
they have some established connections with public officials which allow them to avoid
burdensome regulation procedures
In our study we also introduce a number of country-level variables which characterize
the institutional environment in the countries covered by our sample More specifically we
include an indicator of the financial development as measured by the ratio of domestic credit
to private sector to GDP (one year lag to avoid potential endogeneity) obtained from the
World Bank World Development Indicators (World Bank 2011) This measure has been used
in previous studies (Klapper et al 2006) and it is expected to be of a primary importance for
transition economies where firms tend to rely more on bank finance rather than capital
markets We also introduce a measure of property rights protection (a one year lag) proxied
by the indicator of effective constraints imposed on the executive branch of the government
and obtained from Polity IV project12 This measure of property rights protection is
9 These results are not reported here to save some space However they can be obtained from authors upon request 10 Here it is important to note that although the financial crisis has started in 2007 in the USA it spread to transition economies in 2008-2009 11 Some studies find a non-monotonic relationship between age and firm decision-making In this study we introduce a squared term of age along with a age variable to capture this possible non-linearity 12 Available from httpwwwsystemicpeaceorgpolitypolity4htm
15
considered to be superior to other indicators including the index of property rights reported
by the Heritage Foundation ndashWall Street Journal (for further discussion see Acemoglu and
Johnson 2005 Glaeser et al 2004 Estrin Korosteleva and Mickieiwcz 2011)
In the present study we also introduce macroeconomic controls including cyclical
economic performance as measured by the one year lag of the GDP annual growth rate
and the level of economic development as proxied by a set of GDP pc dummies denoting
the five quintiles of its distribution to address the problem of potential multicollinearity with the
measure of financial development
Finally we include industry and country controls in all our specifications Introducing
country dummies into analysis allows to control for cross-country heterogeneity
For further definition of all variables their descriptive statistics and correlation matrix
see Tables 1-2
43 Dependent variables
To investigate the effect of a firmrsquos size on its perception of financial constraints we
construct a dummy variable coded as 1 capturing a major and very severe obstacle for
access to finance and 0 otherwise
The firm financing choices are defined by the five individual dependent variables
associated with tobit financial choice equations in the seemingly unrelated regression
equations model
One important thing to mention here is the inability to distinguish between
owninternal funds and external private equity considered as one of the limitations of the
2002-2009 BEEPS dataset In the period under investigation BEEPS offers two questions
which aim to capture the use of equity The first one centres around retained earnings and
the second one shows ownersrsquo contributions and private equity or issued new equity
Following some theoretical considerations discussed in sections 2 and 3 in the context of
SMEs we expect the second element of equity to be primarily comprised of existing ownersrsquo
new contributions rather than private equity
Thus the indicator of financial choices represents a set of five individual dependent
variables including retained earnings contributed earnings private borrowing informal
finance trade credit with each of them constructed as a share in total financing of SMErsquos
investment decisions (see Table 1)
44 Methods
16
In this study we employ a number of estimators to obtain robust results More
specifically we use a probit model to investigate the effect of a firm size and the recent
financial crisis on firmsrsquo perception of financial constraints The effect of a firm size in the
situation of crisis is captured by the introduction of the interaction term between firm size as
proxied by the SME indicator and a financial crisis dummy
We further employ the seemingly unrelated regression equations model combined
with the tobit approach for studying firmsrsquo financial structure
Probit model of perception of financial constraints
In the probit model the probability of a firmrsquos perception of financial constraints as
major(j = 1) can be written as follows
( ) ( )int ++
++
infinminus
minus===
ijitj uXjitiitit ijitjuXjy uX
βα βαππ 212-
)()(2 21exp|Pr
Where ity is our measure of financial constraints as perceived by firms and itX is a
set of our explanatory variables discussed in detail in sections 3-4 Here it is important to
note that the interaction term in a probit model cannot be interpreted in a similar way as in
linear models and disregarding this may lead to misleading estimates of the interaction
effect which is of crucial importance for our study (Norton Wang and Ai 2004) Respectively
for robustness of our results here we follow the framework suggested by Norton Wang and
Ai (2004) to account for the model nonlinearity The adjusted marginal effects for the
interaction term are reported in the note to Table 313
Simultaneous Model of Financing Choices
As mentioned above we next model the choice of all five financing choices explicitly
We also hypothesise (following Isachenkova et al 2011) that firm financing choices are likely
to be determined jointly A standard way of modelling jointly determined indicators is a
system of equations - SURE ndash seemingly unrelated regression equations where equations
are linked only by their errors (Zellner 1962) We therefore model the five types of sources of
finance (internal funds private bank borrowing informal finance trade credit and private
13 We also run a probit regression for a split sample of (1) SMEs and (2) large firms to check the robustness of our results (based on the interaction term) while addressing a problem of multicollinearity between a crisis variable and its interaction term with a SME variable The correlation coefficient between a crisis variable and its interaction term with a SME variable is equal to 93 This can be attributed by the problem of a sample being overrepresented by SMEs which constitute 90 of all surveyed firms The results remain robust and can be available from authors upon request
17
equity) using a SURE framework within which we specify a set of five tobit regressions with
correlated residuals
We employ the STATA cmp module which allows to it Seemingly Unrelated Regressions
using the simulated likelihood method such as the Geweke Hajivassiliou and Keane (GHK)
algorithm (for further discussion see Roodman 2008) We utilise a tobit equation to model
each individual financial choice of firms because our dependent financing choices variables
are continuous but their range is constrained (censored) with a substantial number of
observations either equal to zero denoting those who do not use the respective source of
finance or to 100 showing the opposite Other observations are positive and may produce
many different outcomes (Verbeek 2000) Each tobit equation uses a set of identical
explanatory variables that proxy factors which could possibly be associated with firmrsquos
financing choices including industry and country dummies
We also considered the bias caused by potential interdependence between the choice of
whether to invest and firmrsquos financing choices We accounted for the potential selection bias
by introducing into the financial choices SURE Tobit equations (second stage outcome
equations14) the inverse Millrsquos ratio calculated based on modelling the choice to invest in
fixed assets (first stage or selection equation) To identify the first stage of the Heckman
selection model we chose a variable which is correlated with the first stage dependent
variable (investment decision) but not with the second ones (financing choices) We used the
rate of capacity utilization as part of our identification strategy Capacity utilization shows the
percentage of capital stock in use the higher is the rate the more likely firms will increase
investment Batyaeva and Aukutsionek (2001) show that the rate of capacity utilization is
higher in the group of investing firms than in the group of non-investing firms in Russia15 We
calculated the inverse Millrsquos ratio based on the above selection equation16 and included it as
a control in the second stage SURE Tobit equations The inverse Millrsquos ratio has only proved
to be statistically significant in the private bank loan equation pointing to the potential
selection bias arising from the possibility that the factors determining the decision to invest
might differ from those determining the use of bank financing in purchasing fixed assets
14 We also attempted to estimate an investment equation jointly with Tobit financial choices equations within the SURE framework using However given the overall complexity of the model we failed to do this We proceeded further with a two-stage approach by estimating an investment probit equation and calculating the inverse Millrsquos ratio that we add into the outcome financial choices equations at the second stage of the analysis to test for the selection bias 15 We performed an independent sample t-test to check whether the rate of capacity utilization is statistically significantly higher for investing firms compared to non-investing firms for our sample The null hypothesis of no difference was rejected at 1 level of significance 16 To economize on space we do not report the results of the investment probit equation but they are available from authorsrsquo upon request
18
Finally In Table 6 we attempt to condition the determinants of financing constraints
declared by SMEs on the relative percentage increase of trade credit in total funds used for
real investment As mentioned above in Section 2 the timings of measuring the composition
of financing sources precede by a year the timings of measuring the perceptions of financing
constraints That feature of the BEEPSrsquo design allays a likely concern about the endogeneity
of the relative proportion of trade credit and enables causal inference We too report in thre
note to Table 4 the adjusted marginal effects for the interaction term of the SME dummy with
the trade credit variable
In the next section we discuss our empirical results
5 Empirical Results
Table 3 reports the results of the probit model with the marginal effects for firmsrsquo
perception of financial constraints while Tables 4-5 summarize the results of SURE tobits for
a more detailed breakdown of five financing choices More specifically Table 4 reports the
results based on the whole sample to give a comparative perspective on SMErsquos financing
strategy vis-a-vis large businesses whereas Table 5 reports the results based on a
subsample of small and medium-sized firms to shed some light on their financing choices in
the period of crisis
Perception of financial constraints
Table 3 shows that generally small and medium-sized enterprises feel more financially
constrained with the coefficient for SME dummy in relation to the large firms being positive
and significant which is consistent with our discussion in sections 2-3 However the
coefficient of the interaction term with the Crisis dummy turns out to be negative and
significant in relation to the perception of financial constraints as a major obstacle and it
tends to outweigh the effect of a SME dummy when we calculate marginal effects The effect
of the interaction terms with the crisis remains robust after we adjust for non-linearity using
the framework proposed by Norton Wang and Ai (2004)17 Overall these results confirm
that small and medium-sized enterprises are much less financially constrained during the
crisis years with their perceptions close to those of the large firms This result is a polar
opposite to that obtained for the SMEs in the UK (Fraser 2009) which finds that not only do
SMEs generally feel more financially constrained but they report to be even more so during
17 We also check the robustness of our results to the potential problem of multicollinearity between a crisis dummy and its interaction term with SME by splitting a sample and testing the same specification separately for SMEs and large firms We also perform another robustness check by breaking a SME dummy into three subsequent dummies namely micro- small- and medium-sized firms The difference in perception of financial constraints gets almost eliminated in the case of small firms and is largely reduced in the case of micro firms whereas it is less so for medium-sized firms
19
the last crisis We could explain this striking difference by the peculiarities of the SMEs
functioning in new emerging economies The lower reliance of SMEs on external debt in
good times (as shown by results which are discussed below) gives SMEs some flexibility
during the crisis when formal financial markets dry up Jointly with overall flexibility to make
necessary cost cuts and to restructure a business this overall lower reliance on external
funding and the use of alternative sources of financing makes SMEs feel less financially
constrained under the crisis as compared to larger firms
We also find that a more developed financial sector as proxied by domestic private
credit as proportion of GDP helps ease up financial constraints This is in line with the
general literature suggesting that better functioning financial intermediaries facilitate the risk
amelioration in the presence of problems created by market frictions (Levine 1997 Barth et
al 2006 Barth et al 2008)
Unfortunately we fail to find any significant effect of the property rights protection on
firmsrsquo perception of financial constraints that may be explained by the fact that the effect of a
more developed financial sector is likely to outweigh the effect of the property rights
protection
Finally we also find that foreign ownership and international product certificate may
reduce firmsrsquo borrowing constraints while any pressure from domestic or foreign competition
so is pressure from the customers to innovate will increase firmrsquos perception of financial
constraints as major given that firms envisage the need to secure external funding for RampD
or any other innovation-related activities
Financing choices for investment in fixed assets
The results in Table 4 indicate that small enterprises tend to rely more on internal funds
and less on bank loans but they are no different from larger firms in respect of using informal
funds trade credit or private equity which is generally consistent with our discussion in
Sections 2 and 3 The results of Table 5 suggest however that under crisis small and
medium-sized firms tend to switch to other sources of finance such as trade credit and
ownerrsquos contributed equity and to respectively reduce the reliance on retained earnings
perhaps because they decrease due to the negative impact of crisis internal funds With
regards to our discussion of SMEsrsquo risk management we note that the use of private equity
(ownerrsquos contribution) during the crisis years increases which could indicate that the ownerrsquos
funds are used as a cushion in the period of financial distress
An interesting insight regarding the use of trade credit emerges for SMEs in our
sample although in non-crisis years small and medium-sized businesses are not significantly
different from larger firms in terms of reliance on trade credit SMEs tend to finance a
significantly higher proportion of their fixed asset investment by trade credit than large firms
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Beck T A Demirguumlccedil-Kunt L Laeven and V Maksimovic (2006) ldquoThe Determinants of
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Bygrave W 2003 Financing Entrepreneurs and their Ventures In P Reynolds W Bygrave
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Fraser S 2009 Small Firms in the Credit Crisis Evidence from the UK Survey of SME Finances Economic and Social Research Council Report Available at httpwww2warwickacukfacsocwbsresearchcsmeresearchlatestsmall_firms_in_the_credit_crisis_v3-oct09pdf Herbane B 2011 Small business research Time for a crisis-based view International Small
Business Journal 28(1)43ndash64
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the Study of Economic and Social Change in Europe UCL London
Johnson S J McMillan and C Woodruff 2002 Property Rights and Finance The American
Economic Review 92 (5)1335-1356
Klapper L V Sarria-Allende and V Sulla 2002 Small- and Medium-Size Enterprise
Financing in Eastern Europe World Bank Policy Research Working Paper 2933
26
Klapper L F and Randall D 2010 ldquoThe Impact of the Financial Crisis on Supply-Chain
Financingrdquo World Bank Group Enterprise note No 13Korosteleva J and Mickiewicz T
2011 Startup finance in the age of globalisation Emerging Markets Finance and Trade
47(3) 23-49
Korosteleva J and C Lawson (2010) The Belarusian Case of Transition Whither Financial
Repression Post-Communist Economies Vol 22(1)
Levine R 1997 Financial Development and Economic Growth Views and Agenda Journal
of Economic Literature 35 (June) 688-726
Li K Yue H amp Zhao L 2009 Ownership Institutions and Capital Structure Evidence
From China Journal of Comparative Economics 37 471-490
Lizal L and J Svejnar 2002 Investment credit rationing and the soft budget constraint
evidence from Czech panel data Review of Economics and Statistics 84(2) 353-370
Love I 2003 Financial development and financing constraints International evidence from
the structural investment model Review of Financial Studies 16(3) pp 765-79
Love I and R Zaidi 2010 Trade Credit Bank Credit and Financial Crisis International
Review of Finance 10(1) 125-147 March
Mateut S S Bougheas and P Mizen 2006 Trade credit bank lending and monetary
policy transmission European Economic Review 50(3) 603-629
Matthews C H and S G Scott1995 Uncertainty and Planning in Small and
Entrepreneurial Firms An Empirical Assessment Journal of Small Business management
23(4) 34-52
Meltzer A H 1960 Mercantile Credit Monetary Policy and Size of Firms The Review of
Economics and Statistics 42 (4 ) (Nov 1960) 429-437
Mitra P amp Muravyev A amp M Schaffer 2008 Convergence in Institutions and Market
Outcomes Cross-Country and Time-Series Evidence from the BEEPS Surveys in Transition
Economies IZA Discussion Papers 3863 Institute for the Study of Labor (IZA)
Modigliani F and MH Miller 1958 The Cost of Capital Corporation Finance and the
Theory of Investment American Economic Review 48(3) pp 261-97
Nielsen J H 2002 Trade Credit and the Bank Lending Channel Journal of Money Credit
and Banking 34 226-253
Nivorozhkin E 2005 Financing Choices of Firms in EU Accession Countries Emerging
Markets Review 6 138-169
Norton E Wang H and C Ai 2004 Computing Interaction Effects in Logit and Probit
Models The Stata Journal 4(2) 103-116
Petersen M A and R G Rajan 1997 Trade Credit Theory and Evidence Review of
Financial Studies 10 661ndash691
27
Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
No 33
Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
Small- and Medium-sized Businesses in Central and Eastern Europe Journal of Business
Venturing 14 519-539
Pissarides F 2001 Financial Structure to Promote Private Sector Development in South-
Eastern Europe EBRD Working Paper No 64
Pissarides F M Singer and J Svejnar 2003 Objectives and Constraints of Entrepreneurs
Evidence from Small and Medium Size Enterprises in Russia and Bulgaria Journal of
Comparative Economics 31 503-531
Radygin A D A E Gontmakher M G Kuzyk I V Mezheraup H Swain Yu V
Simachiov N A Shmeleva and R M Entov 2005 The institution of Bankruptcy
Development Problems Areas of Reforming Consortium for Economic Policy Research and
Advice Moscow 2005
Ravid S and M Spiegel 1997 Optimal Financing Contracts for a Start-up with Unlimited
Operating Discretion Journal of Financial and Quantitative Analysis 32 269-86
Rostowski J ed 1995 Banking reform in Central Europe and the Soviet Union Budapest
Central University Press
Rehman Shafiq 2011 The Effect of Financial Crisis on the Behaviour of Trade Credit A
Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
Roodman D 2009 Estimating Fully Observed Recursive Mixed-Process Models with cmp CGD Working Paper 168 Washington DC Center for Global Development Sprenger C 2002 ldquoOwnership and Corporate Governance in Russian Industry a Surveyrdquo
EBRD Working Paper No70
Stijn Claessens and Konstantinos Tzioumis 2006 Measuring firmsrsquo access to finance
World Bank Working Paper
Taketa G and K Udell 2007 Lending Channels and Financial Shocks The Case of Small
and Medium-Sized Enterprise Trade Credit and the Japanese Banking Crisis Monetary and
Economic Studies Institute for Monetary and Economic Studies Bank of Japan 25(2) 1- 44
November
Tornell A and F Westermann 2005 Boom-Bust Cycles and Financial Liberalization
Cambridge MA MIT Press
Verbeek M (2000) A Guide to Modern Econometrics John Wiley amp Sons New York
28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
Challenging Environments Journal of Small Business Management 49(1) 107-125
World Bank (2011) World Development Indicators (edition September 2011) ESDS
International University of Manchester DOI httpdxdoiorg105257wbwdi2011-09
Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
7
According to Cull (2007) trade credit can be seen as substitute for loans for private firmsrsquo
trading partners that are shut out of financial credit market Other sources include borrowing
from informal money lenders and family and these emerge as the third important source of
funding SMEsrsquo investment after internal funds and bank credit We expect the informal
finance to be mostly comprised of equity provided by family and friends as funding obtained
from informal private money lenders was overly expensive with the premium standing at least
20 percentage points above that charged by local intermediaries (Pissarides 1998)
Figure 4 to be inserted here
In conclusion we note that the number of studies of the financing decisions of small
and medium-sized enterprises in emerging markets and in particular in the former centrally
planned economies or previously heavily regulated economies such as India has been rather
limited (see eg Nivorozhkin 2005 Delcoure 2007 Crnigoj 2007 Chakraborty 2008
Girma et al 2008 Li et al 2009 Correa et al 2010 Love and Zaidi 2010) We contribute to
this literature by analysing for SMEs in these countries the determinants of the following five
financing options retained earnings private loan (loan finance from private banks) trade
credit private equity (ownersrsquo equity) and informal finance In this study the phrase lsquoinformal
financersquo is an umbrella term that helps condense in one category funds from moneylenders
friends relatives non-banking financial institutions Our results allow us to shed more light
on whether and how the theories of financing choices apply to transition countries in the
credit crunch environment
The following section discusses theories pertaining to small firm financing and how this
may be affected by a financial crisis
3 Small Firm Financing and the Effect of Crisis Theoretical Considerations and
Hypotheses
31 Theoretical arguments
When analysing financing choices of SMEs we first turn to the two cornerstone
theories of explaining leverage the trade-off theory and the pecking order hypothesis (POH)
While the former states that firms may prefer debt to equity in the presence of corporate tax
subject to the costs of potential financial distress stemming from borrowing large amounts
(Modigliani and Miller 1958) the latter suggests that the firms first finance their investment
out of retained earnings as this is the cheapest and the most readily available alternative
then out of debt and lastly via issuing equity which is seen as the most expensive option to
8
the firm (Arnold 2008) More recent literature on firm financing started to look closer at and
emphasize the importance of other sources such as trade credit especially for the small and
medium firms using mostly the data on developed economies For instance Berger amp Udell
(1998) stress the importance of trade credit to the short-term financing of small firms Bevan
and Danbolt (2002) estimate that trade credit account for 62 per cent of total liabilities of UK
firms
The role of trade credit has been seen by some researchers as a substitute of bank
lending for liquidity-constrained firms (Cull 2007) such as SMEs One of the benefits of trade
credit compared to the bank lending is that it allows to partly get around the information
asymmetry problem between the lender and the borrowing SME as business partners would
have more information about the ability of the borrower to repay and about such reputation of
the borrower in the industry Meltzer (1960) Nielsen (2002) and Petersen and Rajan (1997)
argue that trade credit may also provide a means of alternative financing under the tight
monetary conditions such as credit crunches when financial institutions are less able or
willing to provide loans to SMEs In support of this hypothesis Atanasova and Wilson (2003
2004) and Mateut et al (2006) find that under tight monetary conditions firms tend to
substitute bank loans with trade credit However the findings in Bernanke and Gertler (1995)
and Gertler and Gilchrist (1993) do not agree with this hypothesis In line with these authors
Taketa and Udell (2007) using a sample of Japanese SMEs after the crisis years find that
bank lending and trade credit are complements rather than substitutes Love and Zaidi
(2010) report that the use of trade credit by East Asian firms has declined after the 1998
financial crisis together with the use of bank loans Finally interesting enough there is
some empirical evidence which suggests that in the context of transition economies there
may be a higher reliance of SMEs on trade credit in the period of crisis More specifically
focusing on the panel of 1686 firms in Bulgaria Hungary Latvia Lithuania Romania and
Turkey in 2007 and 2009 Klapper and Randall (2010) find that during periods of contractions
in bank credit buyers might depend more on trade credit (although primarily to be used for
short-term financing) that may be particularly true for small firms This provides some support
for the hypothesis that the two sources of finance namely bank loans and trade credit in the
context of transition and emerging economies can be seen as substitutes in period of crisis
Another source of firm financing that has recently received increased attention is
private equity Private equity consists of investments by private individual investors or firms
(business angels investments funds) as well as business ownersrsquo contributions to their
equity The lsquobusiness angelsrsquo type of private equity is currently on the rise in the developed
countries as well as emerging markets such as India Brazil China Malaysia However
ownersrsquo contribution is a far more widespread type of private equity in countries under
consideration Generally SMEs are prone to various types of business and financial risks
9
and it would be very important for them to try and hedge against these risks Zou and Adams
(2008) look at the effect of property insurance on the public firmsrsquo borrowing capacity in
China while Matthews and Scott (1995) in the US and Herbane (2011) in the UK investigate
the types of risk management used by the SMEs The findings point to a rather limited use by
the small and medium-sized enterprises of the risk management assessment and hedging
techniques
In the emerging markets of the post-Soviet bloc the use of risk management techniques
such as hedging with financial derivatives is virtually non-existent However an informal risk
management practice of accumulating cash out of profits and also of using informal lending
from family and friends to serve as a cushion in the times of financial distress as protection
against possible bankruptcy and as an instrument of insurance against risks has been one
way of accounting for the risky nature of SMEs in these countries Secondly many SMEs
sometimes use bankruptcy when they find themselves in the situation of financial distress
and then open a new firm without losing much of their personal assets (Radygin et al 2005)
These SMEs are oftentimes are registered as belonging to a relative or the SMEs could be
registered as founded by an artificially created third party with no links to the actual ownerrsquos
personal assets Recently banks in the new emerging economies such as Russia started a
practice of compulsory purchase of loan insurance if the SME is to take a loan from the bank
This serves as a risk insurance mechanism to a certain extent at the same time however
increasing the cost of bank financing However more recently this practice has attracted the
attention of the Federal Antimonopoly Service that ruled that there is evidence of collusion
between banks and insurance companies Overall we could conclude that the use of risk
management practices is very narrow and of a rather informal nature
The next sub-section explores in greater detail the institutional context of financing in the
situation of economic crisis
Empirical studies on small firm financing in the years of crisis are primarily motivated by
the informational asymmetries theories One of the most important contributions in the study
of the role of SMEs during business cycle has been the real business cycle (RBC) theory
(Bernanke and Gertler 1995 Bernanke Gertler amp Gilchrist 1998) The argument put forward
by the RBC theory is that SMEs face tighter liquidity constraints in terms of external financing
due to higher informational asymmetries associated with their activities the low value of
their assets to serve as collateral the high cost of monitoring small businesses given a small
scale of their investment projects and subsequently the unwillingness of banks to lend to
SMEs
During economic slowdowns when small businesses are even more in need of external
finance bank lending to them diminishes even further which tends to propagate the crisis if
the SMEs then go out of business (see for example Tornell and Westermann 2005) At the
10
same time as larger firms use more finance and tend to rely more on external funding they
may be hit harder by financial contraction in the situation of global crises when international
financial markets dry up so preventing larger firms from drawing upon them when required
They are also less flexible and it is more costly for them to restructure and downsize when
they are hit with external shocks Furthermore while SMEs tend to be more flexible in relying
on other sources of finance including trade credit contributed equity and informal finance
the financial structure of larger firms generally tends to be less diversified with a preference
often given to retained profits and bank finance following the pecking order theory Taken
together we may argue that both supply and demand for finance is more affected for larger
firms in the situation of external shocks
Based on the discussion presented in Sections 2 and 31 we further discuss three main
groups of factors which are likely to affect firmsrsquo perception of financial constraints and their
financing choice strategy These are as follows (1) firm size in general and in the period of
crisis (2) other firm- and industry-specific characteristics including foreign ownership export
orientation firmsrsquo social capital and the degree of competition and its pressure on the firm to
develop a new product and (3) country-level institutional parameters including the degree of
protection of property rights and the development of the financial sector
32 Size of the enterprise and the effect of crisis
With regards to the effect of firm size based on the general discussion in the literature
(see sections 2-31) we expect SMEs to be more financially constrained in their access to
external lending and respectively more reliant on internal funds This is due to insufficient
information that the bank can obtain about a particular SME as well as due to a potentially
lower size of collateral However this lower reliance of SMEs on external debt can potentially
be a source of flexibility during the crisis when formal financial markets dry up and when
even large well-established firms have difficulty obtaining bank credit Furthermore following
Atanasova and Wilson (2003 2004) Mateut et al (2006) and Klapper and Randall (2010) we
expect that under tight monetary conditions SMEs in transition economies are more likely to
switch to alternative forms of financing such as trade credit We also hypothesize that SMEs
are more likely to rely on ownersrsquo contributed equity which they tend to accumulate in good
times as part of their risk management strategy to use it as a cushion in the times of financial
distress In summary we expect the difference between the SMEs and large firms in their
reliance on bank finance to diminish during the crisis years and second SMEs to be more
flexible and rely more on other sources of finance such as trade credit and private equity in
the period of financial contractions
11
33 Firm- and industry- level factors
As far as the firm-level and industry-level variables are concerned we expect the
following results first the level of social capital of a firm as proxied by the inverse of the time
spent dealing with government regulations to indicate possible established connections with
public officials can positively affect its access to trade credit Next the industry-level
pressure on a firm from competitors to develop a new product may increase the firmrsquos
chances of obtaining a bank loan as the bank may perceive the firmrsquos operations as more
diversified and less risky (Isachenkova et al 2011) We also expect foreign competition and
the pressure it exerts on a firm innovation capability to play less important role for firm
financing decisions as SMEs are more likely to operate in market niches and they are
unlikely to compete with multinational enterprises In contrast we expect a pressure
originated from customers on a firm to innovate to increase a firmrsquos probability to rely more
on external sources of funding This may be attributed to the fact that a firm does not only
differentiate itself from other firms further with developing a new product but also assures a
demand for this product by responding to the needs of its existing customers The
guaranteed demand for a new product would be one of the most crucial factors taken into
account by bank managers or potential investors in decision-making concerning project
financing Thirdly international product certification may play a similar role with regards to
bank loans increasing the access to external funds Fourth we investigate the effect on the
choice of financing of the firm age with a square term Generally older firms may have
easier access to bank loans as more information is available about them to the lender (Beck
et al 2006 Canton et al 2010) however due to the particulars of the transition period
sometimes older firms may be less economically viable and unable to get a loan therefore
the sign of this coefficient is uncertain here Lastly we also look at the firmrsquos export
orientation which is expected to increase the reliance on bank lending and its ownership
type where we single out foreign and domestic private firms In the case of foreign firms
they are less likely to use private loans and rely instead on retained earnings and intra-
company funds transfers in the case of MNCs
34 Institutional environment
The impact of institutional variables on the financing choices of firms has been of the
utmost interest to economists and policy-makers during the period of transition (see for
example Stijn and Tzioumis 2006 Mitra et al 2008 see also Commander and Svejnar
(2009) for an in-depth and comprehensive analysis of the impact of various business
environment factors on firm performance using BEEPS 2002 - 2005 panel) In our analysis
12
we concentrate on two institutional factors the degree of protection of property rights and the
size of the formal financial sector which have been claimed to be of key importance for firmsrsquo
financing decisions (see Korosteleva and Mickiewicz (2011) for overview of the related
literature) As far as the property rights protection is concerned it is found to play crucial role
for firm growth and access to external finance (Aidis et al 2008 2010 Korosteleva and
Mickiewicz 2011 Estrin Korosteleva and Mickiewicz 2011) In the environment with weak
protection of property rights financial contracts are less likely to be concluded leading to the
underdevelopment of finance and credit rationing with small firms to be disproportionally
affected the most (Acemoglu and Johnson 2005) Beck et al (2004) show that in terms of
access to external finance small firms benefit disproportionally from higher levels of property
rights protection Lack of secure property rights may also discourage SMEs from taking full
advantage of opportunities to invest (Johnson et al 2002) In a survey of private small
manufacturing firms in Poland Russia Ukraine Romania and Slovakia Johnson et al
(2002) find that small firms tend to reinvest less of their earnings when they perceive their
property rights insecure They also find that the effect of the property rights system is of more
paramount importance for entrepreneursrsquo decisions to reinvest their earnings than availability
of formal finance Moreover if property rights are well-protected this lessens the extent of
potential threat of being expropriated by raidersbank lenders in an artificial bankruptcy
procedure which has been quite a significant issue for firms in Russia and other FSU states
(Radygin et al 2005 Sprenger 2002) Based on this we expect that strong property rights
are likely to encourage SMEs to use more debt as well as to use their own funds and
retained profits for investing in investment projects
With regards to the size of the formal finance as measured by the share of private
credit to GDP the relationship between financial depth and financial constraints has been
extensively studied (Beck et al 2006 also see for example Love 2003 who employing a
sample of 36 countries finds that financial development affects firmsrsquo investment by
increasing the availability of external finance) Financial intermediaries facilitate the risk
amelioration in the presence of problems created by information and transaction frictions by
developing expertise in risk assessment and in monitoring (Levine 1997 Barth et al 2006
Barth et al 2008) Developed financial institutions are found to be particularly beneficial for
small firms compared to large ones (Barth et al 2006 Beck et al 2005 2006 2008)
Pissarides et al (2003) show that financial constraints affect SMEs even more than
deficiency of the property rights protection Accordingly the size of the formal financial
system is expected to be positively related to the use of bank finance as a better functioning
financial system should help ease up borrowing constraints
4 Data and Methodology
13
41 Sample
To explore the determinants of the financial structure of small businesses we use the
2002-2009 Business Environment and Enterprise Performance Survey (BEEPS) data6 of
21867 firms covering 26 transition economies of Europe and Central Asia (ECA)7
The sample is primarily comprised of small and medium-sized businesses8 which
account for 893 per cent of the sample The sample is representative in terms of industrial
coverage with the majority of SMEs of the sample operating in manufacturing wholesale
and retailing industries
BEEPS dataset provides rich information on firm characteristics investment
behaviour and firmsrsquo perception of business environment including financial constraints
which are of a primary interest for our investigation of the effect of the recent financial crisis
on firmsrsquo perception of financial constraints Potentially we could use other micro-level data
characterising various domains of business environment captured by firmsrsquo perceptions for
investigating the effects of the institutional settings However using these micro-level
indicators as explanatory variables would make our study plagued with a problem of
endogeneity To avoid this we merge our firm-level data with country-level indicators
characterising various institutional domains The country level data were obtained from the
World Development Indicators (World Bank) and Polity IV databases (for further discussion
see below) Finally the BEEPs dataset contains other useful information which allows us to
shed light of the effect of for example social capital as proxied by the indirect measure of
possible connections with the authorities (see below for the definition of the variable) on firm
financing
42 Variable Definition and Measurement
Explanatory variables
6 This data is a joint project of the European Bank for Reconstruction and Development and World Bank The first survey was launched in 1999 The dataset used in the present study is an unbalanced panel covering the years of 2002 2005 2007-2009 7 The sample includes the following countries Albania Armenia Azerbaijan Belarus Bosnia Bulgaria Croatia Czech Republic Estonia FYROM Georgia Hungary Kazakhstan Kyrgyzstan Latvia Lithuania Moldova Montenegro Poland Romania Russia Serbia Slovakia Slovenia Tajikistan and Ukraine We exclude Uzbekistan as an outlier from our sample We also exclude Turkey as it is not classified as a post-communist country undertaking transition from a planned to a market economy 8 We utilize the EU employment criterion to define small and medium-sized businesses More specifically businesses are defined as micro if they employ 9 and less employees small ndash between 10 and 49 medium ndash between 50 and 249 and large ndash over 250 employees Respectively SMEs are defined as firms employing less than 249 firms
14
To test our main hypothesis of the effect of a firm size on firmsrsquo perception of financial
constraints we introduce a dummy variable denoting small and medium-sized business
coded as 1 if firms are classified as small or medium-sized businesses according to the EU
definition based on the employment criterion For robustness of our results we also use a
continuous variable denoting a size of employment as measured by the natural logarithm of
employment9 The obtained results are consistent with the ones using the SME indicators
To capture the effect of the recent financial crisis we introduce a crisis dummy coded
as 1 if the year of survey is equal to 2008 or 200910
We also introduce a number of firm-level controls which include age of firm11 type of
ownership including private and foreign ownership export orientation and whether a firm
has an internationally certified product all equal to 1 if a business has a respectively listed
characteristic and zero otherwise We also examine the effect of various sources of pressure
on firms to innovate ndash the indicators which are considered to be important for firm investment
decisions Respectively the pressure for innovation may stem from domestic competition
foreign competition and customers To capture the effect of a firmrsquos social capital we
introduce an indicator which indirectly may capture some possible connections of a firm with
authorities It is proxied by time spent by each firm on dealing with government regulations
We assume the less time firms spend dealing with government regulations the more likely
they have some established connections with public officials which allow them to avoid
burdensome regulation procedures
In our study we also introduce a number of country-level variables which characterize
the institutional environment in the countries covered by our sample More specifically we
include an indicator of the financial development as measured by the ratio of domestic credit
to private sector to GDP (one year lag to avoid potential endogeneity) obtained from the
World Bank World Development Indicators (World Bank 2011) This measure has been used
in previous studies (Klapper et al 2006) and it is expected to be of a primary importance for
transition economies where firms tend to rely more on bank finance rather than capital
markets We also introduce a measure of property rights protection (a one year lag) proxied
by the indicator of effective constraints imposed on the executive branch of the government
and obtained from Polity IV project12 This measure of property rights protection is
9 These results are not reported here to save some space However they can be obtained from authors upon request 10 Here it is important to note that although the financial crisis has started in 2007 in the USA it spread to transition economies in 2008-2009 11 Some studies find a non-monotonic relationship between age and firm decision-making In this study we introduce a squared term of age along with a age variable to capture this possible non-linearity 12 Available from httpwwwsystemicpeaceorgpolitypolity4htm
15
considered to be superior to other indicators including the index of property rights reported
by the Heritage Foundation ndashWall Street Journal (for further discussion see Acemoglu and
Johnson 2005 Glaeser et al 2004 Estrin Korosteleva and Mickieiwcz 2011)
In the present study we also introduce macroeconomic controls including cyclical
economic performance as measured by the one year lag of the GDP annual growth rate
and the level of economic development as proxied by a set of GDP pc dummies denoting
the five quintiles of its distribution to address the problem of potential multicollinearity with the
measure of financial development
Finally we include industry and country controls in all our specifications Introducing
country dummies into analysis allows to control for cross-country heterogeneity
For further definition of all variables their descriptive statistics and correlation matrix
see Tables 1-2
43 Dependent variables
To investigate the effect of a firmrsquos size on its perception of financial constraints we
construct a dummy variable coded as 1 capturing a major and very severe obstacle for
access to finance and 0 otherwise
The firm financing choices are defined by the five individual dependent variables
associated with tobit financial choice equations in the seemingly unrelated regression
equations model
One important thing to mention here is the inability to distinguish between
owninternal funds and external private equity considered as one of the limitations of the
2002-2009 BEEPS dataset In the period under investigation BEEPS offers two questions
which aim to capture the use of equity The first one centres around retained earnings and
the second one shows ownersrsquo contributions and private equity or issued new equity
Following some theoretical considerations discussed in sections 2 and 3 in the context of
SMEs we expect the second element of equity to be primarily comprised of existing ownersrsquo
new contributions rather than private equity
Thus the indicator of financial choices represents a set of five individual dependent
variables including retained earnings contributed earnings private borrowing informal
finance trade credit with each of them constructed as a share in total financing of SMErsquos
investment decisions (see Table 1)
44 Methods
16
In this study we employ a number of estimators to obtain robust results More
specifically we use a probit model to investigate the effect of a firm size and the recent
financial crisis on firmsrsquo perception of financial constraints The effect of a firm size in the
situation of crisis is captured by the introduction of the interaction term between firm size as
proxied by the SME indicator and a financial crisis dummy
We further employ the seemingly unrelated regression equations model combined
with the tobit approach for studying firmsrsquo financial structure
Probit model of perception of financial constraints
In the probit model the probability of a firmrsquos perception of financial constraints as
major(j = 1) can be written as follows
( ) ( )int ++
++
infinminus
minus===
ijitj uXjitiitit ijitjuXjy uX
βα βαππ 212-
)()(2 21exp|Pr
Where ity is our measure of financial constraints as perceived by firms and itX is a
set of our explanatory variables discussed in detail in sections 3-4 Here it is important to
note that the interaction term in a probit model cannot be interpreted in a similar way as in
linear models and disregarding this may lead to misleading estimates of the interaction
effect which is of crucial importance for our study (Norton Wang and Ai 2004) Respectively
for robustness of our results here we follow the framework suggested by Norton Wang and
Ai (2004) to account for the model nonlinearity The adjusted marginal effects for the
interaction term are reported in the note to Table 313
Simultaneous Model of Financing Choices
As mentioned above we next model the choice of all five financing choices explicitly
We also hypothesise (following Isachenkova et al 2011) that firm financing choices are likely
to be determined jointly A standard way of modelling jointly determined indicators is a
system of equations - SURE ndash seemingly unrelated regression equations where equations
are linked only by their errors (Zellner 1962) We therefore model the five types of sources of
finance (internal funds private bank borrowing informal finance trade credit and private
13 We also run a probit regression for a split sample of (1) SMEs and (2) large firms to check the robustness of our results (based on the interaction term) while addressing a problem of multicollinearity between a crisis variable and its interaction term with a SME variable The correlation coefficient between a crisis variable and its interaction term with a SME variable is equal to 93 This can be attributed by the problem of a sample being overrepresented by SMEs which constitute 90 of all surveyed firms The results remain robust and can be available from authors upon request
17
equity) using a SURE framework within which we specify a set of five tobit regressions with
correlated residuals
We employ the STATA cmp module which allows to it Seemingly Unrelated Regressions
using the simulated likelihood method such as the Geweke Hajivassiliou and Keane (GHK)
algorithm (for further discussion see Roodman 2008) We utilise a tobit equation to model
each individual financial choice of firms because our dependent financing choices variables
are continuous but their range is constrained (censored) with a substantial number of
observations either equal to zero denoting those who do not use the respective source of
finance or to 100 showing the opposite Other observations are positive and may produce
many different outcomes (Verbeek 2000) Each tobit equation uses a set of identical
explanatory variables that proxy factors which could possibly be associated with firmrsquos
financing choices including industry and country dummies
We also considered the bias caused by potential interdependence between the choice of
whether to invest and firmrsquos financing choices We accounted for the potential selection bias
by introducing into the financial choices SURE Tobit equations (second stage outcome
equations14) the inverse Millrsquos ratio calculated based on modelling the choice to invest in
fixed assets (first stage or selection equation) To identify the first stage of the Heckman
selection model we chose a variable which is correlated with the first stage dependent
variable (investment decision) but not with the second ones (financing choices) We used the
rate of capacity utilization as part of our identification strategy Capacity utilization shows the
percentage of capital stock in use the higher is the rate the more likely firms will increase
investment Batyaeva and Aukutsionek (2001) show that the rate of capacity utilization is
higher in the group of investing firms than in the group of non-investing firms in Russia15 We
calculated the inverse Millrsquos ratio based on the above selection equation16 and included it as
a control in the second stage SURE Tobit equations The inverse Millrsquos ratio has only proved
to be statistically significant in the private bank loan equation pointing to the potential
selection bias arising from the possibility that the factors determining the decision to invest
might differ from those determining the use of bank financing in purchasing fixed assets
14 We also attempted to estimate an investment equation jointly with Tobit financial choices equations within the SURE framework using However given the overall complexity of the model we failed to do this We proceeded further with a two-stage approach by estimating an investment probit equation and calculating the inverse Millrsquos ratio that we add into the outcome financial choices equations at the second stage of the analysis to test for the selection bias 15 We performed an independent sample t-test to check whether the rate of capacity utilization is statistically significantly higher for investing firms compared to non-investing firms for our sample The null hypothesis of no difference was rejected at 1 level of significance 16 To economize on space we do not report the results of the investment probit equation but they are available from authorsrsquo upon request
18
Finally In Table 6 we attempt to condition the determinants of financing constraints
declared by SMEs on the relative percentage increase of trade credit in total funds used for
real investment As mentioned above in Section 2 the timings of measuring the composition
of financing sources precede by a year the timings of measuring the perceptions of financing
constraints That feature of the BEEPSrsquo design allays a likely concern about the endogeneity
of the relative proportion of trade credit and enables causal inference We too report in thre
note to Table 4 the adjusted marginal effects for the interaction term of the SME dummy with
the trade credit variable
In the next section we discuss our empirical results
5 Empirical Results
Table 3 reports the results of the probit model with the marginal effects for firmsrsquo
perception of financial constraints while Tables 4-5 summarize the results of SURE tobits for
a more detailed breakdown of five financing choices More specifically Table 4 reports the
results based on the whole sample to give a comparative perspective on SMErsquos financing
strategy vis-a-vis large businesses whereas Table 5 reports the results based on a
subsample of small and medium-sized firms to shed some light on their financing choices in
the period of crisis
Perception of financial constraints
Table 3 shows that generally small and medium-sized enterprises feel more financially
constrained with the coefficient for SME dummy in relation to the large firms being positive
and significant which is consistent with our discussion in sections 2-3 However the
coefficient of the interaction term with the Crisis dummy turns out to be negative and
significant in relation to the perception of financial constraints as a major obstacle and it
tends to outweigh the effect of a SME dummy when we calculate marginal effects The effect
of the interaction terms with the crisis remains robust after we adjust for non-linearity using
the framework proposed by Norton Wang and Ai (2004)17 Overall these results confirm
that small and medium-sized enterprises are much less financially constrained during the
crisis years with their perceptions close to those of the large firms This result is a polar
opposite to that obtained for the SMEs in the UK (Fraser 2009) which finds that not only do
SMEs generally feel more financially constrained but they report to be even more so during
17 We also check the robustness of our results to the potential problem of multicollinearity between a crisis dummy and its interaction term with SME by splitting a sample and testing the same specification separately for SMEs and large firms We also perform another robustness check by breaking a SME dummy into three subsequent dummies namely micro- small- and medium-sized firms The difference in perception of financial constraints gets almost eliminated in the case of small firms and is largely reduced in the case of micro firms whereas it is less so for medium-sized firms
19
the last crisis We could explain this striking difference by the peculiarities of the SMEs
functioning in new emerging economies The lower reliance of SMEs on external debt in
good times (as shown by results which are discussed below) gives SMEs some flexibility
during the crisis when formal financial markets dry up Jointly with overall flexibility to make
necessary cost cuts and to restructure a business this overall lower reliance on external
funding and the use of alternative sources of financing makes SMEs feel less financially
constrained under the crisis as compared to larger firms
We also find that a more developed financial sector as proxied by domestic private
credit as proportion of GDP helps ease up financial constraints This is in line with the
general literature suggesting that better functioning financial intermediaries facilitate the risk
amelioration in the presence of problems created by market frictions (Levine 1997 Barth et
al 2006 Barth et al 2008)
Unfortunately we fail to find any significant effect of the property rights protection on
firmsrsquo perception of financial constraints that may be explained by the fact that the effect of a
more developed financial sector is likely to outweigh the effect of the property rights
protection
Finally we also find that foreign ownership and international product certificate may
reduce firmsrsquo borrowing constraints while any pressure from domestic or foreign competition
so is pressure from the customers to innovate will increase firmrsquos perception of financial
constraints as major given that firms envisage the need to secure external funding for RampD
or any other innovation-related activities
Financing choices for investment in fixed assets
The results in Table 4 indicate that small enterprises tend to rely more on internal funds
and less on bank loans but they are no different from larger firms in respect of using informal
funds trade credit or private equity which is generally consistent with our discussion in
Sections 2 and 3 The results of Table 5 suggest however that under crisis small and
medium-sized firms tend to switch to other sources of finance such as trade credit and
ownerrsquos contributed equity and to respectively reduce the reliance on retained earnings
perhaps because they decrease due to the negative impact of crisis internal funds With
regards to our discussion of SMEsrsquo risk management we note that the use of private equity
(ownerrsquos contribution) during the crisis years increases which could indicate that the ownerrsquos
funds are used as a cushion in the period of financial distress
An interesting insight regarding the use of trade credit emerges for SMEs in our
sample although in non-crisis years small and medium-sized businesses are not significantly
different from larger firms in terms of reliance on trade credit SMEs tend to finance a
significantly higher proportion of their fixed asset investment by trade credit than large firms
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Atanasova and Wilson 2003 Bank Borrowing Constraints and the Demand for Trade Credit
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Barth J G Caprio and R Levine 2006 Rethinking Bank Regulation Till Angels Govern
Cambridge University Press New York
Barth J G Caprio and R Levine 2008 Bank Regulations Are Changing For Better or
Worse Working Paper Series 4646 World Bank Washington DC
Bates T 1997 Financial Business Creation The Case of Chinese and Korean Immigrant
Entrepreneurs Journal of Business Venturing 12109-124
Batyaeva A and S Aukutsionek (2001) Investment and Non-Investment in the Russian
Industry Journal of East-West Business 6(4) 5-22
Beck T and A de la Torre 2006 The basic analytics of access to financial services World
Bank Research Paper
Beck T A Demirguumlccedil-Kunt and V Maksimovic 2004 Financing patterns around the world
Are small firms different World Bank working paper
Beck T A Demirguumlccedil-Kunt and V Maksimovic (2005) ldquoFinancial and Legal Constraints to
Growth Does the Firm Size Matterrdquo The Journal of Finance Vol LX No1 February
2005
Beck T A Demirguumlccedil-Kunt L Laeven and V Maksimovic (2006) ldquoThe Determinants of
Financing Obstaclesrdquo The Journal of International Money and Finance 25 pp932-952
Beck T A Demirguumlccedil-Kunt and V Maksimovic 2008 ldquoFinancial Patterns Around the World
Are Small Firms Differentrdquo Journal of Financial Economics 89(3) 467-487
Berger A amp G Udell 1998 The Economics of Small Business Finance The Role of
24
Private Equity and Debt Markets in the Financial Growth Cycle Journal of Banking
and Finance 22 613ndash73
Berglof E and Bolton P 2002 The great divide and beyond financial architecture in
transition Journal of Economic Perspectives 16 (1 Winter) pp 77-100
Bernanke B S amp M Gertler 1995 Inside the Black Box The Credit Channel of Monetary
Policy Transmission NBER Working Papers 5146 National Bureau of Economic Research
Inc
Bernanke B M Gertler amp S Gilchrist 1998 The Financial Accelerator in a Quantitative
Business Cycle Framework in Taylor J amp M Woodford (ed) 1999 Handbook of
Macroeconomics Elsevier 1(1)
Bevan A and J Danbolt 2002 Capital structure and its determinants in the UK - a
decompositional analysis Applied Financial Economics 12(3) 159-170
Bygrave W 2003 Financing Entrepreneurs and their Ventures In P Reynolds W Bygrave
and E Autio eds Global Entrepreneurship Monitor 2003 Global Report Kansas City
Kauffman Center for Entrepreneurial Leadership at the Ewing Mario Kauffman Foundation
Calderon C Didier T 2009 Severity Of The Crisis And Its Transmission Channels World Bank LAC Research Report CantonE I Grilo J Monteagudo and P van der Zwan 2010 Investigating the Perceptions
of Credit Constraints in the European Union Erasmus Research Institute of Management
Report
Chakraborty I 2008 Capital Structure in Emerging Stock Market The Case of India
Research in International Business and Finance doi101016jribaf201002001
Chang C Lee A amp Lee C 2009 Determinants of Capital Structure Choice A Structural
Equation Modeling Approach Quarterly Journal of Economics and Finance 49 197-213
Commander SJ amp J Svejnar 2011 Business Environment Exports Ownership and Firm
Performance Review of Economics and Statistics 931 309-337
Correa PG Fernandes AM amp Uregian C 2010 Technology Adoption and the Investment
Climate Firm-Level Evidence for Eastern Europe and Central Asia The World
Bank Economic Review 24 121-147
Crnigoj M 2007 Risk Averse Insiders with Specific Objective Function and Capital
Structure Mimeo
Cull R and L C Xu 2007 Formal Finance and Trade Credit during Chinarsquos Transition
World Bank Policy Research Working Paper 4204
De La Torre AM Peria and S Schmukler 2008 Bank Involvement with SMEs Beyond
Relationship Lending Working Paper Series 4649 World Bank Washington DC
Delcoure N 2007 The Determinants of Capital Structure in Transitional Economies
25
International Review of Economics and Finance 16 400-415
Didier T Hevia C and Schmukler SL 2011 How Resilient Were Emerging Economies to the Global Crisis World Bank Policy Research Working Paper No 5637
Estrin S and T Mickiewicz 2010 Entrepreneurship in Transition Economies The Role of
Institutions Forthcoming in edited volume by M Minitti at Oxford UP
Estrin S J Korostelva and T Mickiewicz 2011 Which Institutions Encourage Entrepreneurs
to Create Larger Firms IZA Discussion Paper 5481 available from
httpftpizaorgdp5481pdf
Ge Y and J Qiu 2007 Financial Development Bank Discrimination and Trade Credit
Journal of Banking amp Finance 31 513ndash530
Gertler M and S Gilchrist 1993 The Role of Credit Market Imperfections in the Monetary
Transmission Mechanism Arguments and Evidence The Scandinavian Journal of
Economics 95(1) (Mar 1993) 43-64
Girma S Gong Y amp Gorg H 2008 Foreign Direct Investment Access to Finance and
Innovation Activity in Chinese Enterprises The World Bank Economic Review 22 367-382
Glaeser E R La Porta F Lopez-de-Silanes and A Shleifer Do Institutions Cause
Growth NBER Working Paper Series 10568 2004
Gorodnichenko Y and M Schnitzer 2010 Financial constraints and innovation Why poor
countries donrsquot catch up NBER working papers 15792 National Bureau of Economic
Research Inc
Fraser S 2009 Small Firms in the Credit Crisis Evidence from the UK Survey of SME Finances Economic and Social Research Council Report Available at httpwww2warwickacukfacsocwbsresearchcsmeresearchlatestsmall_firms_in_the_credit_crisis_v3-oct09pdf Herbane B 2011 Small business research Time for a crisis-based view International Small
Business Journal 28(1)43ndash64
Huyghebaert N 2001 The Capital Structure of the Business Start-ups Determinants of
Initial Capital Structure Review of Banking and Finance 284-88
Isachenkova N J Korosteleva and Y Rodionova 2011 Financing Choices A Study of
Entrepreneurial Firms in High-tech Industries CSESCE Working Paper No Centre for
the Study of Economic and Social Change in Europe UCL London
Johnson S J McMillan and C Woodruff 2002 Property Rights and Finance The American
Economic Review 92 (5)1335-1356
Klapper L V Sarria-Allende and V Sulla 2002 Small- and Medium-Size Enterprise
Financing in Eastern Europe World Bank Policy Research Working Paper 2933
26
Klapper L F and Randall D 2010 ldquoThe Impact of the Financial Crisis on Supply-Chain
Financingrdquo World Bank Group Enterprise note No 13Korosteleva J and Mickiewicz T
2011 Startup finance in the age of globalisation Emerging Markets Finance and Trade
47(3) 23-49
Korosteleva J and C Lawson (2010) The Belarusian Case of Transition Whither Financial
Repression Post-Communist Economies Vol 22(1)
Levine R 1997 Financial Development and Economic Growth Views and Agenda Journal
of Economic Literature 35 (June) 688-726
Li K Yue H amp Zhao L 2009 Ownership Institutions and Capital Structure Evidence
From China Journal of Comparative Economics 37 471-490
Lizal L and J Svejnar 2002 Investment credit rationing and the soft budget constraint
evidence from Czech panel data Review of Economics and Statistics 84(2) 353-370
Love I 2003 Financial development and financing constraints International evidence from
the structural investment model Review of Financial Studies 16(3) pp 765-79
Love I and R Zaidi 2010 Trade Credit Bank Credit and Financial Crisis International
Review of Finance 10(1) 125-147 March
Mateut S S Bougheas and P Mizen 2006 Trade credit bank lending and monetary
policy transmission European Economic Review 50(3) 603-629
Matthews C H and S G Scott1995 Uncertainty and Planning in Small and
Entrepreneurial Firms An Empirical Assessment Journal of Small Business management
23(4) 34-52
Meltzer A H 1960 Mercantile Credit Monetary Policy and Size of Firms The Review of
Economics and Statistics 42 (4 ) (Nov 1960) 429-437
Mitra P amp Muravyev A amp M Schaffer 2008 Convergence in Institutions and Market
Outcomes Cross-Country and Time-Series Evidence from the BEEPS Surveys in Transition
Economies IZA Discussion Papers 3863 Institute for the Study of Labor (IZA)
Modigliani F and MH Miller 1958 The Cost of Capital Corporation Finance and the
Theory of Investment American Economic Review 48(3) pp 261-97
Nielsen J H 2002 Trade Credit and the Bank Lending Channel Journal of Money Credit
and Banking 34 226-253
Nivorozhkin E 2005 Financing Choices of Firms in EU Accession Countries Emerging
Markets Review 6 138-169
Norton E Wang H and C Ai 2004 Computing Interaction Effects in Logit and Probit
Models The Stata Journal 4(2) 103-116
Petersen M A and R G Rajan 1997 Trade Credit Theory and Evidence Review of
Financial Studies 10 661ndash691
27
Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
No 33
Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
Small- and Medium-sized Businesses in Central and Eastern Europe Journal of Business
Venturing 14 519-539
Pissarides F 2001 Financial Structure to Promote Private Sector Development in South-
Eastern Europe EBRD Working Paper No 64
Pissarides F M Singer and J Svejnar 2003 Objectives and Constraints of Entrepreneurs
Evidence from Small and Medium Size Enterprises in Russia and Bulgaria Journal of
Comparative Economics 31 503-531
Radygin A D A E Gontmakher M G Kuzyk I V Mezheraup H Swain Yu V
Simachiov N A Shmeleva and R M Entov 2005 The institution of Bankruptcy
Development Problems Areas of Reforming Consortium for Economic Policy Research and
Advice Moscow 2005
Ravid S and M Spiegel 1997 Optimal Financing Contracts for a Start-up with Unlimited
Operating Discretion Journal of Financial and Quantitative Analysis 32 269-86
Rostowski J ed 1995 Banking reform in Central Europe and the Soviet Union Budapest
Central University Press
Rehman Shafiq 2011 The Effect of Financial Crisis on the Behaviour of Trade Credit A
Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
Roodman D 2009 Estimating Fully Observed Recursive Mixed-Process Models with cmp CGD Working Paper 168 Washington DC Center for Global Development Sprenger C 2002 ldquoOwnership and Corporate Governance in Russian Industry a Surveyrdquo
EBRD Working Paper No70
Stijn Claessens and Konstantinos Tzioumis 2006 Measuring firmsrsquo access to finance
World Bank Working Paper
Taketa G and K Udell 2007 Lending Channels and Financial Shocks The Case of Small
and Medium-Sized Enterprise Trade Credit and the Japanese Banking Crisis Monetary and
Economic Studies Institute for Monetary and Economic Studies Bank of Japan 25(2) 1- 44
November
Tornell A and F Westermann 2005 Boom-Bust Cycles and Financial Liberalization
Cambridge MA MIT Press
Verbeek M (2000) A Guide to Modern Econometrics John Wiley amp Sons New York
28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
Challenging Environments Journal of Small Business Management 49(1) 107-125
World Bank (2011) World Development Indicators (edition September 2011) ESDS
International University of Manchester DOI httpdxdoiorg105257wbwdi2011-09
Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
8
the firm (Arnold 2008) More recent literature on firm financing started to look closer at and
emphasize the importance of other sources such as trade credit especially for the small and
medium firms using mostly the data on developed economies For instance Berger amp Udell
(1998) stress the importance of trade credit to the short-term financing of small firms Bevan
and Danbolt (2002) estimate that trade credit account for 62 per cent of total liabilities of UK
firms
The role of trade credit has been seen by some researchers as a substitute of bank
lending for liquidity-constrained firms (Cull 2007) such as SMEs One of the benefits of trade
credit compared to the bank lending is that it allows to partly get around the information
asymmetry problem between the lender and the borrowing SME as business partners would
have more information about the ability of the borrower to repay and about such reputation of
the borrower in the industry Meltzer (1960) Nielsen (2002) and Petersen and Rajan (1997)
argue that trade credit may also provide a means of alternative financing under the tight
monetary conditions such as credit crunches when financial institutions are less able or
willing to provide loans to SMEs In support of this hypothesis Atanasova and Wilson (2003
2004) and Mateut et al (2006) find that under tight monetary conditions firms tend to
substitute bank loans with trade credit However the findings in Bernanke and Gertler (1995)
and Gertler and Gilchrist (1993) do not agree with this hypothesis In line with these authors
Taketa and Udell (2007) using a sample of Japanese SMEs after the crisis years find that
bank lending and trade credit are complements rather than substitutes Love and Zaidi
(2010) report that the use of trade credit by East Asian firms has declined after the 1998
financial crisis together with the use of bank loans Finally interesting enough there is
some empirical evidence which suggests that in the context of transition economies there
may be a higher reliance of SMEs on trade credit in the period of crisis More specifically
focusing on the panel of 1686 firms in Bulgaria Hungary Latvia Lithuania Romania and
Turkey in 2007 and 2009 Klapper and Randall (2010) find that during periods of contractions
in bank credit buyers might depend more on trade credit (although primarily to be used for
short-term financing) that may be particularly true for small firms This provides some support
for the hypothesis that the two sources of finance namely bank loans and trade credit in the
context of transition and emerging economies can be seen as substitutes in period of crisis
Another source of firm financing that has recently received increased attention is
private equity Private equity consists of investments by private individual investors or firms
(business angels investments funds) as well as business ownersrsquo contributions to their
equity The lsquobusiness angelsrsquo type of private equity is currently on the rise in the developed
countries as well as emerging markets such as India Brazil China Malaysia However
ownersrsquo contribution is a far more widespread type of private equity in countries under
consideration Generally SMEs are prone to various types of business and financial risks
9
and it would be very important for them to try and hedge against these risks Zou and Adams
(2008) look at the effect of property insurance on the public firmsrsquo borrowing capacity in
China while Matthews and Scott (1995) in the US and Herbane (2011) in the UK investigate
the types of risk management used by the SMEs The findings point to a rather limited use by
the small and medium-sized enterprises of the risk management assessment and hedging
techniques
In the emerging markets of the post-Soviet bloc the use of risk management techniques
such as hedging with financial derivatives is virtually non-existent However an informal risk
management practice of accumulating cash out of profits and also of using informal lending
from family and friends to serve as a cushion in the times of financial distress as protection
against possible bankruptcy and as an instrument of insurance against risks has been one
way of accounting for the risky nature of SMEs in these countries Secondly many SMEs
sometimes use bankruptcy when they find themselves in the situation of financial distress
and then open a new firm without losing much of their personal assets (Radygin et al 2005)
These SMEs are oftentimes are registered as belonging to a relative or the SMEs could be
registered as founded by an artificially created third party with no links to the actual ownerrsquos
personal assets Recently banks in the new emerging economies such as Russia started a
practice of compulsory purchase of loan insurance if the SME is to take a loan from the bank
This serves as a risk insurance mechanism to a certain extent at the same time however
increasing the cost of bank financing However more recently this practice has attracted the
attention of the Federal Antimonopoly Service that ruled that there is evidence of collusion
between banks and insurance companies Overall we could conclude that the use of risk
management practices is very narrow and of a rather informal nature
The next sub-section explores in greater detail the institutional context of financing in the
situation of economic crisis
Empirical studies on small firm financing in the years of crisis are primarily motivated by
the informational asymmetries theories One of the most important contributions in the study
of the role of SMEs during business cycle has been the real business cycle (RBC) theory
(Bernanke and Gertler 1995 Bernanke Gertler amp Gilchrist 1998) The argument put forward
by the RBC theory is that SMEs face tighter liquidity constraints in terms of external financing
due to higher informational asymmetries associated with their activities the low value of
their assets to serve as collateral the high cost of monitoring small businesses given a small
scale of their investment projects and subsequently the unwillingness of banks to lend to
SMEs
During economic slowdowns when small businesses are even more in need of external
finance bank lending to them diminishes even further which tends to propagate the crisis if
the SMEs then go out of business (see for example Tornell and Westermann 2005) At the
10
same time as larger firms use more finance and tend to rely more on external funding they
may be hit harder by financial contraction in the situation of global crises when international
financial markets dry up so preventing larger firms from drawing upon them when required
They are also less flexible and it is more costly for them to restructure and downsize when
they are hit with external shocks Furthermore while SMEs tend to be more flexible in relying
on other sources of finance including trade credit contributed equity and informal finance
the financial structure of larger firms generally tends to be less diversified with a preference
often given to retained profits and bank finance following the pecking order theory Taken
together we may argue that both supply and demand for finance is more affected for larger
firms in the situation of external shocks
Based on the discussion presented in Sections 2 and 31 we further discuss three main
groups of factors which are likely to affect firmsrsquo perception of financial constraints and their
financing choice strategy These are as follows (1) firm size in general and in the period of
crisis (2) other firm- and industry-specific characteristics including foreign ownership export
orientation firmsrsquo social capital and the degree of competition and its pressure on the firm to
develop a new product and (3) country-level institutional parameters including the degree of
protection of property rights and the development of the financial sector
32 Size of the enterprise and the effect of crisis
With regards to the effect of firm size based on the general discussion in the literature
(see sections 2-31) we expect SMEs to be more financially constrained in their access to
external lending and respectively more reliant on internal funds This is due to insufficient
information that the bank can obtain about a particular SME as well as due to a potentially
lower size of collateral However this lower reliance of SMEs on external debt can potentially
be a source of flexibility during the crisis when formal financial markets dry up and when
even large well-established firms have difficulty obtaining bank credit Furthermore following
Atanasova and Wilson (2003 2004) Mateut et al (2006) and Klapper and Randall (2010) we
expect that under tight monetary conditions SMEs in transition economies are more likely to
switch to alternative forms of financing such as trade credit We also hypothesize that SMEs
are more likely to rely on ownersrsquo contributed equity which they tend to accumulate in good
times as part of their risk management strategy to use it as a cushion in the times of financial
distress In summary we expect the difference between the SMEs and large firms in their
reliance on bank finance to diminish during the crisis years and second SMEs to be more
flexible and rely more on other sources of finance such as trade credit and private equity in
the period of financial contractions
11
33 Firm- and industry- level factors
As far as the firm-level and industry-level variables are concerned we expect the
following results first the level of social capital of a firm as proxied by the inverse of the time
spent dealing with government regulations to indicate possible established connections with
public officials can positively affect its access to trade credit Next the industry-level
pressure on a firm from competitors to develop a new product may increase the firmrsquos
chances of obtaining a bank loan as the bank may perceive the firmrsquos operations as more
diversified and less risky (Isachenkova et al 2011) We also expect foreign competition and
the pressure it exerts on a firm innovation capability to play less important role for firm
financing decisions as SMEs are more likely to operate in market niches and they are
unlikely to compete with multinational enterprises In contrast we expect a pressure
originated from customers on a firm to innovate to increase a firmrsquos probability to rely more
on external sources of funding This may be attributed to the fact that a firm does not only
differentiate itself from other firms further with developing a new product but also assures a
demand for this product by responding to the needs of its existing customers The
guaranteed demand for a new product would be one of the most crucial factors taken into
account by bank managers or potential investors in decision-making concerning project
financing Thirdly international product certification may play a similar role with regards to
bank loans increasing the access to external funds Fourth we investigate the effect on the
choice of financing of the firm age with a square term Generally older firms may have
easier access to bank loans as more information is available about them to the lender (Beck
et al 2006 Canton et al 2010) however due to the particulars of the transition period
sometimes older firms may be less economically viable and unable to get a loan therefore
the sign of this coefficient is uncertain here Lastly we also look at the firmrsquos export
orientation which is expected to increase the reliance on bank lending and its ownership
type where we single out foreign and domestic private firms In the case of foreign firms
they are less likely to use private loans and rely instead on retained earnings and intra-
company funds transfers in the case of MNCs
34 Institutional environment
The impact of institutional variables on the financing choices of firms has been of the
utmost interest to economists and policy-makers during the period of transition (see for
example Stijn and Tzioumis 2006 Mitra et al 2008 see also Commander and Svejnar
(2009) for an in-depth and comprehensive analysis of the impact of various business
environment factors on firm performance using BEEPS 2002 - 2005 panel) In our analysis
12
we concentrate on two institutional factors the degree of protection of property rights and the
size of the formal financial sector which have been claimed to be of key importance for firmsrsquo
financing decisions (see Korosteleva and Mickiewicz (2011) for overview of the related
literature) As far as the property rights protection is concerned it is found to play crucial role
for firm growth and access to external finance (Aidis et al 2008 2010 Korosteleva and
Mickiewicz 2011 Estrin Korosteleva and Mickiewicz 2011) In the environment with weak
protection of property rights financial contracts are less likely to be concluded leading to the
underdevelopment of finance and credit rationing with small firms to be disproportionally
affected the most (Acemoglu and Johnson 2005) Beck et al (2004) show that in terms of
access to external finance small firms benefit disproportionally from higher levels of property
rights protection Lack of secure property rights may also discourage SMEs from taking full
advantage of opportunities to invest (Johnson et al 2002) In a survey of private small
manufacturing firms in Poland Russia Ukraine Romania and Slovakia Johnson et al
(2002) find that small firms tend to reinvest less of their earnings when they perceive their
property rights insecure They also find that the effect of the property rights system is of more
paramount importance for entrepreneursrsquo decisions to reinvest their earnings than availability
of formal finance Moreover if property rights are well-protected this lessens the extent of
potential threat of being expropriated by raidersbank lenders in an artificial bankruptcy
procedure which has been quite a significant issue for firms in Russia and other FSU states
(Radygin et al 2005 Sprenger 2002) Based on this we expect that strong property rights
are likely to encourage SMEs to use more debt as well as to use their own funds and
retained profits for investing in investment projects
With regards to the size of the formal finance as measured by the share of private
credit to GDP the relationship between financial depth and financial constraints has been
extensively studied (Beck et al 2006 also see for example Love 2003 who employing a
sample of 36 countries finds that financial development affects firmsrsquo investment by
increasing the availability of external finance) Financial intermediaries facilitate the risk
amelioration in the presence of problems created by information and transaction frictions by
developing expertise in risk assessment and in monitoring (Levine 1997 Barth et al 2006
Barth et al 2008) Developed financial institutions are found to be particularly beneficial for
small firms compared to large ones (Barth et al 2006 Beck et al 2005 2006 2008)
Pissarides et al (2003) show that financial constraints affect SMEs even more than
deficiency of the property rights protection Accordingly the size of the formal financial
system is expected to be positively related to the use of bank finance as a better functioning
financial system should help ease up borrowing constraints
4 Data and Methodology
13
41 Sample
To explore the determinants of the financial structure of small businesses we use the
2002-2009 Business Environment and Enterprise Performance Survey (BEEPS) data6 of
21867 firms covering 26 transition economies of Europe and Central Asia (ECA)7
The sample is primarily comprised of small and medium-sized businesses8 which
account for 893 per cent of the sample The sample is representative in terms of industrial
coverage with the majority of SMEs of the sample operating in manufacturing wholesale
and retailing industries
BEEPS dataset provides rich information on firm characteristics investment
behaviour and firmsrsquo perception of business environment including financial constraints
which are of a primary interest for our investigation of the effect of the recent financial crisis
on firmsrsquo perception of financial constraints Potentially we could use other micro-level data
characterising various domains of business environment captured by firmsrsquo perceptions for
investigating the effects of the institutional settings However using these micro-level
indicators as explanatory variables would make our study plagued with a problem of
endogeneity To avoid this we merge our firm-level data with country-level indicators
characterising various institutional domains The country level data were obtained from the
World Development Indicators (World Bank) and Polity IV databases (for further discussion
see below) Finally the BEEPs dataset contains other useful information which allows us to
shed light of the effect of for example social capital as proxied by the indirect measure of
possible connections with the authorities (see below for the definition of the variable) on firm
financing
42 Variable Definition and Measurement
Explanatory variables
6 This data is a joint project of the European Bank for Reconstruction and Development and World Bank The first survey was launched in 1999 The dataset used in the present study is an unbalanced panel covering the years of 2002 2005 2007-2009 7 The sample includes the following countries Albania Armenia Azerbaijan Belarus Bosnia Bulgaria Croatia Czech Republic Estonia FYROM Georgia Hungary Kazakhstan Kyrgyzstan Latvia Lithuania Moldova Montenegro Poland Romania Russia Serbia Slovakia Slovenia Tajikistan and Ukraine We exclude Uzbekistan as an outlier from our sample We also exclude Turkey as it is not classified as a post-communist country undertaking transition from a planned to a market economy 8 We utilize the EU employment criterion to define small and medium-sized businesses More specifically businesses are defined as micro if they employ 9 and less employees small ndash between 10 and 49 medium ndash between 50 and 249 and large ndash over 250 employees Respectively SMEs are defined as firms employing less than 249 firms
14
To test our main hypothesis of the effect of a firm size on firmsrsquo perception of financial
constraints we introduce a dummy variable denoting small and medium-sized business
coded as 1 if firms are classified as small or medium-sized businesses according to the EU
definition based on the employment criterion For robustness of our results we also use a
continuous variable denoting a size of employment as measured by the natural logarithm of
employment9 The obtained results are consistent with the ones using the SME indicators
To capture the effect of the recent financial crisis we introduce a crisis dummy coded
as 1 if the year of survey is equal to 2008 or 200910
We also introduce a number of firm-level controls which include age of firm11 type of
ownership including private and foreign ownership export orientation and whether a firm
has an internationally certified product all equal to 1 if a business has a respectively listed
characteristic and zero otherwise We also examine the effect of various sources of pressure
on firms to innovate ndash the indicators which are considered to be important for firm investment
decisions Respectively the pressure for innovation may stem from domestic competition
foreign competition and customers To capture the effect of a firmrsquos social capital we
introduce an indicator which indirectly may capture some possible connections of a firm with
authorities It is proxied by time spent by each firm on dealing with government regulations
We assume the less time firms spend dealing with government regulations the more likely
they have some established connections with public officials which allow them to avoid
burdensome regulation procedures
In our study we also introduce a number of country-level variables which characterize
the institutional environment in the countries covered by our sample More specifically we
include an indicator of the financial development as measured by the ratio of domestic credit
to private sector to GDP (one year lag to avoid potential endogeneity) obtained from the
World Bank World Development Indicators (World Bank 2011) This measure has been used
in previous studies (Klapper et al 2006) and it is expected to be of a primary importance for
transition economies where firms tend to rely more on bank finance rather than capital
markets We also introduce a measure of property rights protection (a one year lag) proxied
by the indicator of effective constraints imposed on the executive branch of the government
and obtained from Polity IV project12 This measure of property rights protection is
9 These results are not reported here to save some space However they can be obtained from authors upon request 10 Here it is important to note that although the financial crisis has started in 2007 in the USA it spread to transition economies in 2008-2009 11 Some studies find a non-monotonic relationship between age and firm decision-making In this study we introduce a squared term of age along with a age variable to capture this possible non-linearity 12 Available from httpwwwsystemicpeaceorgpolitypolity4htm
15
considered to be superior to other indicators including the index of property rights reported
by the Heritage Foundation ndashWall Street Journal (for further discussion see Acemoglu and
Johnson 2005 Glaeser et al 2004 Estrin Korosteleva and Mickieiwcz 2011)
In the present study we also introduce macroeconomic controls including cyclical
economic performance as measured by the one year lag of the GDP annual growth rate
and the level of economic development as proxied by a set of GDP pc dummies denoting
the five quintiles of its distribution to address the problem of potential multicollinearity with the
measure of financial development
Finally we include industry and country controls in all our specifications Introducing
country dummies into analysis allows to control for cross-country heterogeneity
For further definition of all variables their descriptive statistics and correlation matrix
see Tables 1-2
43 Dependent variables
To investigate the effect of a firmrsquos size on its perception of financial constraints we
construct a dummy variable coded as 1 capturing a major and very severe obstacle for
access to finance and 0 otherwise
The firm financing choices are defined by the five individual dependent variables
associated with tobit financial choice equations in the seemingly unrelated regression
equations model
One important thing to mention here is the inability to distinguish between
owninternal funds and external private equity considered as one of the limitations of the
2002-2009 BEEPS dataset In the period under investigation BEEPS offers two questions
which aim to capture the use of equity The first one centres around retained earnings and
the second one shows ownersrsquo contributions and private equity or issued new equity
Following some theoretical considerations discussed in sections 2 and 3 in the context of
SMEs we expect the second element of equity to be primarily comprised of existing ownersrsquo
new contributions rather than private equity
Thus the indicator of financial choices represents a set of five individual dependent
variables including retained earnings contributed earnings private borrowing informal
finance trade credit with each of them constructed as a share in total financing of SMErsquos
investment decisions (see Table 1)
44 Methods
16
In this study we employ a number of estimators to obtain robust results More
specifically we use a probit model to investigate the effect of a firm size and the recent
financial crisis on firmsrsquo perception of financial constraints The effect of a firm size in the
situation of crisis is captured by the introduction of the interaction term between firm size as
proxied by the SME indicator and a financial crisis dummy
We further employ the seemingly unrelated regression equations model combined
with the tobit approach for studying firmsrsquo financial structure
Probit model of perception of financial constraints
In the probit model the probability of a firmrsquos perception of financial constraints as
major(j = 1) can be written as follows
( ) ( )int ++
++
infinminus
minus===
ijitj uXjitiitit ijitjuXjy uX
βα βαππ 212-
)()(2 21exp|Pr
Where ity is our measure of financial constraints as perceived by firms and itX is a
set of our explanatory variables discussed in detail in sections 3-4 Here it is important to
note that the interaction term in a probit model cannot be interpreted in a similar way as in
linear models and disregarding this may lead to misleading estimates of the interaction
effect which is of crucial importance for our study (Norton Wang and Ai 2004) Respectively
for robustness of our results here we follow the framework suggested by Norton Wang and
Ai (2004) to account for the model nonlinearity The adjusted marginal effects for the
interaction term are reported in the note to Table 313
Simultaneous Model of Financing Choices
As mentioned above we next model the choice of all five financing choices explicitly
We also hypothesise (following Isachenkova et al 2011) that firm financing choices are likely
to be determined jointly A standard way of modelling jointly determined indicators is a
system of equations - SURE ndash seemingly unrelated regression equations where equations
are linked only by their errors (Zellner 1962) We therefore model the five types of sources of
finance (internal funds private bank borrowing informal finance trade credit and private
13 We also run a probit regression for a split sample of (1) SMEs and (2) large firms to check the robustness of our results (based on the interaction term) while addressing a problem of multicollinearity between a crisis variable and its interaction term with a SME variable The correlation coefficient between a crisis variable and its interaction term with a SME variable is equal to 93 This can be attributed by the problem of a sample being overrepresented by SMEs which constitute 90 of all surveyed firms The results remain robust and can be available from authors upon request
17
equity) using a SURE framework within which we specify a set of five tobit regressions with
correlated residuals
We employ the STATA cmp module which allows to it Seemingly Unrelated Regressions
using the simulated likelihood method such as the Geweke Hajivassiliou and Keane (GHK)
algorithm (for further discussion see Roodman 2008) We utilise a tobit equation to model
each individual financial choice of firms because our dependent financing choices variables
are continuous but their range is constrained (censored) with a substantial number of
observations either equal to zero denoting those who do not use the respective source of
finance or to 100 showing the opposite Other observations are positive and may produce
many different outcomes (Verbeek 2000) Each tobit equation uses a set of identical
explanatory variables that proxy factors which could possibly be associated with firmrsquos
financing choices including industry and country dummies
We also considered the bias caused by potential interdependence between the choice of
whether to invest and firmrsquos financing choices We accounted for the potential selection bias
by introducing into the financial choices SURE Tobit equations (second stage outcome
equations14) the inverse Millrsquos ratio calculated based on modelling the choice to invest in
fixed assets (first stage or selection equation) To identify the first stage of the Heckman
selection model we chose a variable which is correlated with the first stage dependent
variable (investment decision) but not with the second ones (financing choices) We used the
rate of capacity utilization as part of our identification strategy Capacity utilization shows the
percentage of capital stock in use the higher is the rate the more likely firms will increase
investment Batyaeva and Aukutsionek (2001) show that the rate of capacity utilization is
higher in the group of investing firms than in the group of non-investing firms in Russia15 We
calculated the inverse Millrsquos ratio based on the above selection equation16 and included it as
a control in the second stage SURE Tobit equations The inverse Millrsquos ratio has only proved
to be statistically significant in the private bank loan equation pointing to the potential
selection bias arising from the possibility that the factors determining the decision to invest
might differ from those determining the use of bank financing in purchasing fixed assets
14 We also attempted to estimate an investment equation jointly with Tobit financial choices equations within the SURE framework using However given the overall complexity of the model we failed to do this We proceeded further with a two-stage approach by estimating an investment probit equation and calculating the inverse Millrsquos ratio that we add into the outcome financial choices equations at the second stage of the analysis to test for the selection bias 15 We performed an independent sample t-test to check whether the rate of capacity utilization is statistically significantly higher for investing firms compared to non-investing firms for our sample The null hypothesis of no difference was rejected at 1 level of significance 16 To economize on space we do not report the results of the investment probit equation but they are available from authorsrsquo upon request
18
Finally In Table 6 we attempt to condition the determinants of financing constraints
declared by SMEs on the relative percentage increase of trade credit in total funds used for
real investment As mentioned above in Section 2 the timings of measuring the composition
of financing sources precede by a year the timings of measuring the perceptions of financing
constraints That feature of the BEEPSrsquo design allays a likely concern about the endogeneity
of the relative proportion of trade credit and enables causal inference We too report in thre
note to Table 4 the adjusted marginal effects for the interaction term of the SME dummy with
the trade credit variable
In the next section we discuss our empirical results
5 Empirical Results
Table 3 reports the results of the probit model with the marginal effects for firmsrsquo
perception of financial constraints while Tables 4-5 summarize the results of SURE tobits for
a more detailed breakdown of five financing choices More specifically Table 4 reports the
results based on the whole sample to give a comparative perspective on SMErsquos financing
strategy vis-a-vis large businesses whereas Table 5 reports the results based on a
subsample of small and medium-sized firms to shed some light on their financing choices in
the period of crisis
Perception of financial constraints
Table 3 shows that generally small and medium-sized enterprises feel more financially
constrained with the coefficient for SME dummy in relation to the large firms being positive
and significant which is consistent with our discussion in sections 2-3 However the
coefficient of the interaction term with the Crisis dummy turns out to be negative and
significant in relation to the perception of financial constraints as a major obstacle and it
tends to outweigh the effect of a SME dummy when we calculate marginal effects The effect
of the interaction terms with the crisis remains robust after we adjust for non-linearity using
the framework proposed by Norton Wang and Ai (2004)17 Overall these results confirm
that small and medium-sized enterprises are much less financially constrained during the
crisis years with their perceptions close to those of the large firms This result is a polar
opposite to that obtained for the SMEs in the UK (Fraser 2009) which finds that not only do
SMEs generally feel more financially constrained but they report to be even more so during
17 We also check the robustness of our results to the potential problem of multicollinearity between a crisis dummy and its interaction term with SME by splitting a sample and testing the same specification separately for SMEs and large firms We also perform another robustness check by breaking a SME dummy into three subsequent dummies namely micro- small- and medium-sized firms The difference in perception of financial constraints gets almost eliminated in the case of small firms and is largely reduced in the case of micro firms whereas it is less so for medium-sized firms
19
the last crisis We could explain this striking difference by the peculiarities of the SMEs
functioning in new emerging economies The lower reliance of SMEs on external debt in
good times (as shown by results which are discussed below) gives SMEs some flexibility
during the crisis when formal financial markets dry up Jointly with overall flexibility to make
necessary cost cuts and to restructure a business this overall lower reliance on external
funding and the use of alternative sources of financing makes SMEs feel less financially
constrained under the crisis as compared to larger firms
We also find that a more developed financial sector as proxied by domestic private
credit as proportion of GDP helps ease up financial constraints This is in line with the
general literature suggesting that better functioning financial intermediaries facilitate the risk
amelioration in the presence of problems created by market frictions (Levine 1997 Barth et
al 2006 Barth et al 2008)
Unfortunately we fail to find any significant effect of the property rights protection on
firmsrsquo perception of financial constraints that may be explained by the fact that the effect of a
more developed financial sector is likely to outweigh the effect of the property rights
protection
Finally we also find that foreign ownership and international product certificate may
reduce firmsrsquo borrowing constraints while any pressure from domestic or foreign competition
so is pressure from the customers to innovate will increase firmrsquos perception of financial
constraints as major given that firms envisage the need to secure external funding for RampD
or any other innovation-related activities
Financing choices for investment in fixed assets
The results in Table 4 indicate that small enterprises tend to rely more on internal funds
and less on bank loans but they are no different from larger firms in respect of using informal
funds trade credit or private equity which is generally consistent with our discussion in
Sections 2 and 3 The results of Table 5 suggest however that under crisis small and
medium-sized firms tend to switch to other sources of finance such as trade credit and
ownerrsquos contributed equity and to respectively reduce the reliance on retained earnings
perhaps because they decrease due to the negative impact of crisis internal funds With
regards to our discussion of SMEsrsquo risk management we note that the use of private equity
(ownerrsquos contribution) during the crisis years increases which could indicate that the ownerrsquos
funds are used as a cushion in the period of financial distress
An interesting insight regarding the use of trade credit emerges for SMEs in our
sample although in non-crisis years small and medium-sized businesses are not significantly
different from larger firms in terms of reliance on trade credit SMEs tend to finance a
significantly higher proportion of their fixed asset investment by trade credit than large firms
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Aidis R Estrin S Mickiewicz T 2010 Size matters entrepreneurial entry and
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Arnold G 2008 Corporate Financial Management 4th Edition Prentice Hall
Atanasova and Wilson 2003 Bank Borrowing Constraints and the Demand for Trade Credit
Evidence from Panel Data Managerial and Decision Economics Special Issue The
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Barth J G Caprio and R Levine 2006 Rethinking Bank Regulation Till Angels Govern
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Beck T A Demirguumlccedil-Kunt and V Maksimovic 2004 Financing patterns around the world
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Beck T A Demirguumlccedil-Kunt L Laeven and V Maksimovic (2006) ldquoThe Determinants of
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Beck T A Demirguumlccedil-Kunt and V Maksimovic 2008 ldquoFinancial Patterns Around the World
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Berger A amp G Udell 1998 The Economics of Small Business Finance The Role of
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and Finance 22 613ndash73
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Policy Transmission NBER Working Papers 5146 National Bureau of Economic Research
Inc
Bernanke B M Gertler amp S Gilchrist 1998 The Financial Accelerator in a Quantitative
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Bevan A and J Danbolt 2002 Capital structure and its determinants in the UK - a
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Chakraborty I 2008 Capital Structure in Emerging Stock Market The Case of India
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Cull R and L C Xu 2007 Formal Finance and Trade Credit during Chinarsquos Transition
World Bank Policy Research Working Paper 4204
De La Torre AM Peria and S Schmukler 2008 Bank Involvement with SMEs Beyond
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Delcoure N 2007 The Determinants of Capital Structure in Transitional Economies
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International Review of Economics and Finance 16 400-415
Didier T Hevia C and Schmukler SL 2011 How Resilient Were Emerging Economies to the Global Crisis World Bank Policy Research Working Paper No 5637
Estrin S and T Mickiewicz 2010 Entrepreneurship in Transition Economies The Role of
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Fraser S 2009 Small Firms in the Credit Crisis Evidence from the UK Survey of SME Finances Economic and Social Research Council Report Available at httpwww2warwickacukfacsocwbsresearchcsmeresearchlatestsmall_firms_in_the_credit_crisis_v3-oct09pdf Herbane B 2011 Small business research Time for a crisis-based view International Small
Business Journal 28(1)43ndash64
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Financing in Eastern Europe World Bank Policy Research Working Paper 2933
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Financingrdquo World Bank Group Enterprise note No 13Korosteleva J and Mickiewicz T
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Economics and Statistics 42 (4 ) (Nov 1960) 429-437
Mitra P amp Muravyev A amp M Schaffer 2008 Convergence in Institutions and Market
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27
Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
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Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
Small- and Medium-sized Businesses in Central and Eastern Europe Journal of Business
Venturing 14 519-539
Pissarides F 2001 Financial Structure to Promote Private Sector Development in South-
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Evidence from Small and Medium Size Enterprises in Russia and Bulgaria Journal of
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Radygin A D A E Gontmakher M G Kuzyk I V Mezheraup H Swain Yu V
Simachiov N A Shmeleva and R M Entov 2005 The institution of Bankruptcy
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Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
Roodman D 2009 Estimating Fully Observed Recursive Mixed-Process Models with cmp CGD Working Paper 168 Washington DC Center for Global Development Sprenger C 2002 ldquoOwnership and Corporate Governance in Russian Industry a Surveyrdquo
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Stijn Claessens and Konstantinos Tzioumis 2006 Measuring firmsrsquo access to finance
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28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
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Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
9
and it would be very important for them to try and hedge against these risks Zou and Adams
(2008) look at the effect of property insurance on the public firmsrsquo borrowing capacity in
China while Matthews and Scott (1995) in the US and Herbane (2011) in the UK investigate
the types of risk management used by the SMEs The findings point to a rather limited use by
the small and medium-sized enterprises of the risk management assessment and hedging
techniques
In the emerging markets of the post-Soviet bloc the use of risk management techniques
such as hedging with financial derivatives is virtually non-existent However an informal risk
management practice of accumulating cash out of profits and also of using informal lending
from family and friends to serve as a cushion in the times of financial distress as protection
against possible bankruptcy and as an instrument of insurance against risks has been one
way of accounting for the risky nature of SMEs in these countries Secondly many SMEs
sometimes use bankruptcy when they find themselves in the situation of financial distress
and then open a new firm without losing much of their personal assets (Radygin et al 2005)
These SMEs are oftentimes are registered as belonging to a relative or the SMEs could be
registered as founded by an artificially created third party with no links to the actual ownerrsquos
personal assets Recently banks in the new emerging economies such as Russia started a
practice of compulsory purchase of loan insurance if the SME is to take a loan from the bank
This serves as a risk insurance mechanism to a certain extent at the same time however
increasing the cost of bank financing However more recently this practice has attracted the
attention of the Federal Antimonopoly Service that ruled that there is evidence of collusion
between banks and insurance companies Overall we could conclude that the use of risk
management practices is very narrow and of a rather informal nature
The next sub-section explores in greater detail the institutional context of financing in the
situation of economic crisis
Empirical studies on small firm financing in the years of crisis are primarily motivated by
the informational asymmetries theories One of the most important contributions in the study
of the role of SMEs during business cycle has been the real business cycle (RBC) theory
(Bernanke and Gertler 1995 Bernanke Gertler amp Gilchrist 1998) The argument put forward
by the RBC theory is that SMEs face tighter liquidity constraints in terms of external financing
due to higher informational asymmetries associated with their activities the low value of
their assets to serve as collateral the high cost of monitoring small businesses given a small
scale of their investment projects and subsequently the unwillingness of banks to lend to
SMEs
During economic slowdowns when small businesses are even more in need of external
finance bank lending to them diminishes even further which tends to propagate the crisis if
the SMEs then go out of business (see for example Tornell and Westermann 2005) At the
10
same time as larger firms use more finance and tend to rely more on external funding they
may be hit harder by financial contraction in the situation of global crises when international
financial markets dry up so preventing larger firms from drawing upon them when required
They are also less flexible and it is more costly for them to restructure and downsize when
they are hit with external shocks Furthermore while SMEs tend to be more flexible in relying
on other sources of finance including trade credit contributed equity and informal finance
the financial structure of larger firms generally tends to be less diversified with a preference
often given to retained profits and bank finance following the pecking order theory Taken
together we may argue that both supply and demand for finance is more affected for larger
firms in the situation of external shocks
Based on the discussion presented in Sections 2 and 31 we further discuss three main
groups of factors which are likely to affect firmsrsquo perception of financial constraints and their
financing choice strategy These are as follows (1) firm size in general and in the period of
crisis (2) other firm- and industry-specific characteristics including foreign ownership export
orientation firmsrsquo social capital and the degree of competition and its pressure on the firm to
develop a new product and (3) country-level institutional parameters including the degree of
protection of property rights and the development of the financial sector
32 Size of the enterprise and the effect of crisis
With regards to the effect of firm size based on the general discussion in the literature
(see sections 2-31) we expect SMEs to be more financially constrained in their access to
external lending and respectively more reliant on internal funds This is due to insufficient
information that the bank can obtain about a particular SME as well as due to a potentially
lower size of collateral However this lower reliance of SMEs on external debt can potentially
be a source of flexibility during the crisis when formal financial markets dry up and when
even large well-established firms have difficulty obtaining bank credit Furthermore following
Atanasova and Wilson (2003 2004) Mateut et al (2006) and Klapper and Randall (2010) we
expect that under tight monetary conditions SMEs in transition economies are more likely to
switch to alternative forms of financing such as trade credit We also hypothesize that SMEs
are more likely to rely on ownersrsquo contributed equity which they tend to accumulate in good
times as part of their risk management strategy to use it as a cushion in the times of financial
distress In summary we expect the difference between the SMEs and large firms in their
reliance on bank finance to diminish during the crisis years and second SMEs to be more
flexible and rely more on other sources of finance such as trade credit and private equity in
the period of financial contractions
11
33 Firm- and industry- level factors
As far as the firm-level and industry-level variables are concerned we expect the
following results first the level of social capital of a firm as proxied by the inverse of the time
spent dealing with government regulations to indicate possible established connections with
public officials can positively affect its access to trade credit Next the industry-level
pressure on a firm from competitors to develop a new product may increase the firmrsquos
chances of obtaining a bank loan as the bank may perceive the firmrsquos operations as more
diversified and less risky (Isachenkova et al 2011) We also expect foreign competition and
the pressure it exerts on a firm innovation capability to play less important role for firm
financing decisions as SMEs are more likely to operate in market niches and they are
unlikely to compete with multinational enterprises In contrast we expect a pressure
originated from customers on a firm to innovate to increase a firmrsquos probability to rely more
on external sources of funding This may be attributed to the fact that a firm does not only
differentiate itself from other firms further with developing a new product but also assures a
demand for this product by responding to the needs of its existing customers The
guaranteed demand for a new product would be one of the most crucial factors taken into
account by bank managers or potential investors in decision-making concerning project
financing Thirdly international product certification may play a similar role with regards to
bank loans increasing the access to external funds Fourth we investigate the effect on the
choice of financing of the firm age with a square term Generally older firms may have
easier access to bank loans as more information is available about them to the lender (Beck
et al 2006 Canton et al 2010) however due to the particulars of the transition period
sometimes older firms may be less economically viable and unable to get a loan therefore
the sign of this coefficient is uncertain here Lastly we also look at the firmrsquos export
orientation which is expected to increase the reliance on bank lending and its ownership
type where we single out foreign and domestic private firms In the case of foreign firms
they are less likely to use private loans and rely instead on retained earnings and intra-
company funds transfers in the case of MNCs
34 Institutional environment
The impact of institutional variables on the financing choices of firms has been of the
utmost interest to economists and policy-makers during the period of transition (see for
example Stijn and Tzioumis 2006 Mitra et al 2008 see also Commander and Svejnar
(2009) for an in-depth and comprehensive analysis of the impact of various business
environment factors on firm performance using BEEPS 2002 - 2005 panel) In our analysis
12
we concentrate on two institutional factors the degree of protection of property rights and the
size of the formal financial sector which have been claimed to be of key importance for firmsrsquo
financing decisions (see Korosteleva and Mickiewicz (2011) for overview of the related
literature) As far as the property rights protection is concerned it is found to play crucial role
for firm growth and access to external finance (Aidis et al 2008 2010 Korosteleva and
Mickiewicz 2011 Estrin Korosteleva and Mickiewicz 2011) In the environment with weak
protection of property rights financial contracts are less likely to be concluded leading to the
underdevelopment of finance and credit rationing with small firms to be disproportionally
affected the most (Acemoglu and Johnson 2005) Beck et al (2004) show that in terms of
access to external finance small firms benefit disproportionally from higher levels of property
rights protection Lack of secure property rights may also discourage SMEs from taking full
advantage of opportunities to invest (Johnson et al 2002) In a survey of private small
manufacturing firms in Poland Russia Ukraine Romania and Slovakia Johnson et al
(2002) find that small firms tend to reinvest less of their earnings when they perceive their
property rights insecure They also find that the effect of the property rights system is of more
paramount importance for entrepreneursrsquo decisions to reinvest their earnings than availability
of formal finance Moreover if property rights are well-protected this lessens the extent of
potential threat of being expropriated by raidersbank lenders in an artificial bankruptcy
procedure which has been quite a significant issue for firms in Russia and other FSU states
(Radygin et al 2005 Sprenger 2002) Based on this we expect that strong property rights
are likely to encourage SMEs to use more debt as well as to use their own funds and
retained profits for investing in investment projects
With regards to the size of the formal finance as measured by the share of private
credit to GDP the relationship between financial depth and financial constraints has been
extensively studied (Beck et al 2006 also see for example Love 2003 who employing a
sample of 36 countries finds that financial development affects firmsrsquo investment by
increasing the availability of external finance) Financial intermediaries facilitate the risk
amelioration in the presence of problems created by information and transaction frictions by
developing expertise in risk assessment and in monitoring (Levine 1997 Barth et al 2006
Barth et al 2008) Developed financial institutions are found to be particularly beneficial for
small firms compared to large ones (Barth et al 2006 Beck et al 2005 2006 2008)
Pissarides et al (2003) show that financial constraints affect SMEs even more than
deficiency of the property rights protection Accordingly the size of the formal financial
system is expected to be positively related to the use of bank finance as a better functioning
financial system should help ease up borrowing constraints
4 Data and Methodology
13
41 Sample
To explore the determinants of the financial structure of small businesses we use the
2002-2009 Business Environment and Enterprise Performance Survey (BEEPS) data6 of
21867 firms covering 26 transition economies of Europe and Central Asia (ECA)7
The sample is primarily comprised of small and medium-sized businesses8 which
account for 893 per cent of the sample The sample is representative in terms of industrial
coverage with the majority of SMEs of the sample operating in manufacturing wholesale
and retailing industries
BEEPS dataset provides rich information on firm characteristics investment
behaviour and firmsrsquo perception of business environment including financial constraints
which are of a primary interest for our investigation of the effect of the recent financial crisis
on firmsrsquo perception of financial constraints Potentially we could use other micro-level data
characterising various domains of business environment captured by firmsrsquo perceptions for
investigating the effects of the institutional settings However using these micro-level
indicators as explanatory variables would make our study plagued with a problem of
endogeneity To avoid this we merge our firm-level data with country-level indicators
characterising various institutional domains The country level data were obtained from the
World Development Indicators (World Bank) and Polity IV databases (for further discussion
see below) Finally the BEEPs dataset contains other useful information which allows us to
shed light of the effect of for example social capital as proxied by the indirect measure of
possible connections with the authorities (see below for the definition of the variable) on firm
financing
42 Variable Definition and Measurement
Explanatory variables
6 This data is a joint project of the European Bank for Reconstruction and Development and World Bank The first survey was launched in 1999 The dataset used in the present study is an unbalanced panel covering the years of 2002 2005 2007-2009 7 The sample includes the following countries Albania Armenia Azerbaijan Belarus Bosnia Bulgaria Croatia Czech Republic Estonia FYROM Georgia Hungary Kazakhstan Kyrgyzstan Latvia Lithuania Moldova Montenegro Poland Romania Russia Serbia Slovakia Slovenia Tajikistan and Ukraine We exclude Uzbekistan as an outlier from our sample We also exclude Turkey as it is not classified as a post-communist country undertaking transition from a planned to a market economy 8 We utilize the EU employment criterion to define small and medium-sized businesses More specifically businesses are defined as micro if they employ 9 and less employees small ndash between 10 and 49 medium ndash between 50 and 249 and large ndash over 250 employees Respectively SMEs are defined as firms employing less than 249 firms
14
To test our main hypothesis of the effect of a firm size on firmsrsquo perception of financial
constraints we introduce a dummy variable denoting small and medium-sized business
coded as 1 if firms are classified as small or medium-sized businesses according to the EU
definition based on the employment criterion For robustness of our results we also use a
continuous variable denoting a size of employment as measured by the natural logarithm of
employment9 The obtained results are consistent with the ones using the SME indicators
To capture the effect of the recent financial crisis we introduce a crisis dummy coded
as 1 if the year of survey is equal to 2008 or 200910
We also introduce a number of firm-level controls which include age of firm11 type of
ownership including private and foreign ownership export orientation and whether a firm
has an internationally certified product all equal to 1 if a business has a respectively listed
characteristic and zero otherwise We also examine the effect of various sources of pressure
on firms to innovate ndash the indicators which are considered to be important for firm investment
decisions Respectively the pressure for innovation may stem from domestic competition
foreign competition and customers To capture the effect of a firmrsquos social capital we
introduce an indicator which indirectly may capture some possible connections of a firm with
authorities It is proxied by time spent by each firm on dealing with government regulations
We assume the less time firms spend dealing with government regulations the more likely
they have some established connections with public officials which allow them to avoid
burdensome regulation procedures
In our study we also introduce a number of country-level variables which characterize
the institutional environment in the countries covered by our sample More specifically we
include an indicator of the financial development as measured by the ratio of domestic credit
to private sector to GDP (one year lag to avoid potential endogeneity) obtained from the
World Bank World Development Indicators (World Bank 2011) This measure has been used
in previous studies (Klapper et al 2006) and it is expected to be of a primary importance for
transition economies where firms tend to rely more on bank finance rather than capital
markets We also introduce a measure of property rights protection (a one year lag) proxied
by the indicator of effective constraints imposed on the executive branch of the government
and obtained from Polity IV project12 This measure of property rights protection is
9 These results are not reported here to save some space However they can be obtained from authors upon request 10 Here it is important to note that although the financial crisis has started in 2007 in the USA it spread to transition economies in 2008-2009 11 Some studies find a non-monotonic relationship between age and firm decision-making In this study we introduce a squared term of age along with a age variable to capture this possible non-linearity 12 Available from httpwwwsystemicpeaceorgpolitypolity4htm
15
considered to be superior to other indicators including the index of property rights reported
by the Heritage Foundation ndashWall Street Journal (for further discussion see Acemoglu and
Johnson 2005 Glaeser et al 2004 Estrin Korosteleva and Mickieiwcz 2011)
In the present study we also introduce macroeconomic controls including cyclical
economic performance as measured by the one year lag of the GDP annual growth rate
and the level of economic development as proxied by a set of GDP pc dummies denoting
the five quintiles of its distribution to address the problem of potential multicollinearity with the
measure of financial development
Finally we include industry and country controls in all our specifications Introducing
country dummies into analysis allows to control for cross-country heterogeneity
For further definition of all variables their descriptive statistics and correlation matrix
see Tables 1-2
43 Dependent variables
To investigate the effect of a firmrsquos size on its perception of financial constraints we
construct a dummy variable coded as 1 capturing a major and very severe obstacle for
access to finance and 0 otherwise
The firm financing choices are defined by the five individual dependent variables
associated with tobit financial choice equations in the seemingly unrelated regression
equations model
One important thing to mention here is the inability to distinguish between
owninternal funds and external private equity considered as one of the limitations of the
2002-2009 BEEPS dataset In the period under investigation BEEPS offers two questions
which aim to capture the use of equity The first one centres around retained earnings and
the second one shows ownersrsquo contributions and private equity or issued new equity
Following some theoretical considerations discussed in sections 2 and 3 in the context of
SMEs we expect the second element of equity to be primarily comprised of existing ownersrsquo
new contributions rather than private equity
Thus the indicator of financial choices represents a set of five individual dependent
variables including retained earnings contributed earnings private borrowing informal
finance trade credit with each of them constructed as a share in total financing of SMErsquos
investment decisions (see Table 1)
44 Methods
16
In this study we employ a number of estimators to obtain robust results More
specifically we use a probit model to investigate the effect of a firm size and the recent
financial crisis on firmsrsquo perception of financial constraints The effect of a firm size in the
situation of crisis is captured by the introduction of the interaction term between firm size as
proxied by the SME indicator and a financial crisis dummy
We further employ the seemingly unrelated regression equations model combined
with the tobit approach for studying firmsrsquo financial structure
Probit model of perception of financial constraints
In the probit model the probability of a firmrsquos perception of financial constraints as
major(j = 1) can be written as follows
( ) ( )int ++
++
infinminus
minus===
ijitj uXjitiitit ijitjuXjy uX
βα βαππ 212-
)()(2 21exp|Pr
Where ity is our measure of financial constraints as perceived by firms and itX is a
set of our explanatory variables discussed in detail in sections 3-4 Here it is important to
note that the interaction term in a probit model cannot be interpreted in a similar way as in
linear models and disregarding this may lead to misleading estimates of the interaction
effect which is of crucial importance for our study (Norton Wang and Ai 2004) Respectively
for robustness of our results here we follow the framework suggested by Norton Wang and
Ai (2004) to account for the model nonlinearity The adjusted marginal effects for the
interaction term are reported in the note to Table 313
Simultaneous Model of Financing Choices
As mentioned above we next model the choice of all five financing choices explicitly
We also hypothesise (following Isachenkova et al 2011) that firm financing choices are likely
to be determined jointly A standard way of modelling jointly determined indicators is a
system of equations - SURE ndash seemingly unrelated regression equations where equations
are linked only by their errors (Zellner 1962) We therefore model the five types of sources of
finance (internal funds private bank borrowing informal finance trade credit and private
13 We also run a probit regression for a split sample of (1) SMEs and (2) large firms to check the robustness of our results (based on the interaction term) while addressing a problem of multicollinearity between a crisis variable and its interaction term with a SME variable The correlation coefficient between a crisis variable and its interaction term with a SME variable is equal to 93 This can be attributed by the problem of a sample being overrepresented by SMEs which constitute 90 of all surveyed firms The results remain robust and can be available from authors upon request
17
equity) using a SURE framework within which we specify a set of five tobit regressions with
correlated residuals
We employ the STATA cmp module which allows to it Seemingly Unrelated Regressions
using the simulated likelihood method such as the Geweke Hajivassiliou and Keane (GHK)
algorithm (for further discussion see Roodman 2008) We utilise a tobit equation to model
each individual financial choice of firms because our dependent financing choices variables
are continuous but their range is constrained (censored) with a substantial number of
observations either equal to zero denoting those who do not use the respective source of
finance or to 100 showing the opposite Other observations are positive and may produce
many different outcomes (Verbeek 2000) Each tobit equation uses a set of identical
explanatory variables that proxy factors which could possibly be associated with firmrsquos
financing choices including industry and country dummies
We also considered the bias caused by potential interdependence between the choice of
whether to invest and firmrsquos financing choices We accounted for the potential selection bias
by introducing into the financial choices SURE Tobit equations (second stage outcome
equations14) the inverse Millrsquos ratio calculated based on modelling the choice to invest in
fixed assets (first stage or selection equation) To identify the first stage of the Heckman
selection model we chose a variable which is correlated with the first stage dependent
variable (investment decision) but not with the second ones (financing choices) We used the
rate of capacity utilization as part of our identification strategy Capacity utilization shows the
percentage of capital stock in use the higher is the rate the more likely firms will increase
investment Batyaeva and Aukutsionek (2001) show that the rate of capacity utilization is
higher in the group of investing firms than in the group of non-investing firms in Russia15 We
calculated the inverse Millrsquos ratio based on the above selection equation16 and included it as
a control in the second stage SURE Tobit equations The inverse Millrsquos ratio has only proved
to be statistically significant in the private bank loan equation pointing to the potential
selection bias arising from the possibility that the factors determining the decision to invest
might differ from those determining the use of bank financing in purchasing fixed assets
14 We also attempted to estimate an investment equation jointly with Tobit financial choices equations within the SURE framework using However given the overall complexity of the model we failed to do this We proceeded further with a two-stage approach by estimating an investment probit equation and calculating the inverse Millrsquos ratio that we add into the outcome financial choices equations at the second stage of the analysis to test for the selection bias 15 We performed an independent sample t-test to check whether the rate of capacity utilization is statistically significantly higher for investing firms compared to non-investing firms for our sample The null hypothesis of no difference was rejected at 1 level of significance 16 To economize on space we do not report the results of the investment probit equation but they are available from authorsrsquo upon request
18
Finally In Table 6 we attempt to condition the determinants of financing constraints
declared by SMEs on the relative percentage increase of trade credit in total funds used for
real investment As mentioned above in Section 2 the timings of measuring the composition
of financing sources precede by a year the timings of measuring the perceptions of financing
constraints That feature of the BEEPSrsquo design allays a likely concern about the endogeneity
of the relative proportion of trade credit and enables causal inference We too report in thre
note to Table 4 the adjusted marginal effects for the interaction term of the SME dummy with
the trade credit variable
In the next section we discuss our empirical results
5 Empirical Results
Table 3 reports the results of the probit model with the marginal effects for firmsrsquo
perception of financial constraints while Tables 4-5 summarize the results of SURE tobits for
a more detailed breakdown of five financing choices More specifically Table 4 reports the
results based on the whole sample to give a comparative perspective on SMErsquos financing
strategy vis-a-vis large businesses whereas Table 5 reports the results based on a
subsample of small and medium-sized firms to shed some light on their financing choices in
the period of crisis
Perception of financial constraints
Table 3 shows that generally small and medium-sized enterprises feel more financially
constrained with the coefficient for SME dummy in relation to the large firms being positive
and significant which is consistent with our discussion in sections 2-3 However the
coefficient of the interaction term with the Crisis dummy turns out to be negative and
significant in relation to the perception of financial constraints as a major obstacle and it
tends to outweigh the effect of a SME dummy when we calculate marginal effects The effect
of the interaction terms with the crisis remains robust after we adjust for non-linearity using
the framework proposed by Norton Wang and Ai (2004)17 Overall these results confirm
that small and medium-sized enterprises are much less financially constrained during the
crisis years with their perceptions close to those of the large firms This result is a polar
opposite to that obtained for the SMEs in the UK (Fraser 2009) which finds that not only do
SMEs generally feel more financially constrained but they report to be even more so during
17 We also check the robustness of our results to the potential problem of multicollinearity between a crisis dummy and its interaction term with SME by splitting a sample and testing the same specification separately for SMEs and large firms We also perform another robustness check by breaking a SME dummy into three subsequent dummies namely micro- small- and medium-sized firms The difference in perception of financial constraints gets almost eliminated in the case of small firms and is largely reduced in the case of micro firms whereas it is less so for medium-sized firms
19
the last crisis We could explain this striking difference by the peculiarities of the SMEs
functioning in new emerging economies The lower reliance of SMEs on external debt in
good times (as shown by results which are discussed below) gives SMEs some flexibility
during the crisis when formal financial markets dry up Jointly with overall flexibility to make
necessary cost cuts and to restructure a business this overall lower reliance on external
funding and the use of alternative sources of financing makes SMEs feel less financially
constrained under the crisis as compared to larger firms
We also find that a more developed financial sector as proxied by domestic private
credit as proportion of GDP helps ease up financial constraints This is in line with the
general literature suggesting that better functioning financial intermediaries facilitate the risk
amelioration in the presence of problems created by market frictions (Levine 1997 Barth et
al 2006 Barth et al 2008)
Unfortunately we fail to find any significant effect of the property rights protection on
firmsrsquo perception of financial constraints that may be explained by the fact that the effect of a
more developed financial sector is likely to outweigh the effect of the property rights
protection
Finally we also find that foreign ownership and international product certificate may
reduce firmsrsquo borrowing constraints while any pressure from domestic or foreign competition
so is pressure from the customers to innovate will increase firmrsquos perception of financial
constraints as major given that firms envisage the need to secure external funding for RampD
or any other innovation-related activities
Financing choices for investment in fixed assets
The results in Table 4 indicate that small enterprises tend to rely more on internal funds
and less on bank loans but they are no different from larger firms in respect of using informal
funds trade credit or private equity which is generally consistent with our discussion in
Sections 2 and 3 The results of Table 5 suggest however that under crisis small and
medium-sized firms tend to switch to other sources of finance such as trade credit and
ownerrsquos contributed equity and to respectively reduce the reliance on retained earnings
perhaps because they decrease due to the negative impact of crisis internal funds With
regards to our discussion of SMEsrsquo risk management we note that the use of private equity
(ownerrsquos contribution) during the crisis years increases which could indicate that the ownerrsquos
funds are used as a cushion in the period of financial distress
An interesting insight regarding the use of trade credit emerges for SMEs in our
sample although in non-crisis years small and medium-sized businesses are not significantly
different from larger firms in terms of reliance on trade credit SMEs tend to finance a
significantly higher proportion of their fixed asset investment by trade credit than large firms
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Aidis R Estrin S Mickiewicz T 2010 Size matters entrepreneurial entry and
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Arnold G 2008 Corporate Financial Management 4th Edition Prentice Hall
Atanasova and Wilson 2003 Bank Borrowing Constraints and the Demand for Trade Credit
Evidence from Panel Data Managerial and Decision Economics Special Issue The
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Barth J G Caprio and R Levine 2006 Rethinking Bank Regulation Till Angels Govern
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Beck T A Demirguumlccedil-Kunt L Laeven and V Maksimovic (2006) ldquoThe Determinants of
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Beck T A Demirguumlccedil-Kunt and V Maksimovic 2008 ldquoFinancial Patterns Around the World
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Berger A amp G Udell 1998 The Economics of Small Business Finance The Role of
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Policy Transmission NBER Working Papers 5146 National Bureau of Economic Research
Inc
Bernanke B M Gertler amp S Gilchrist 1998 The Financial Accelerator in a Quantitative
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Bevan A and J Danbolt 2002 Capital structure and its determinants in the UK - a
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Cull R and L C Xu 2007 Formal Finance and Trade Credit during Chinarsquos Transition
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De La Torre AM Peria and S Schmukler 2008 Bank Involvement with SMEs Beyond
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Delcoure N 2007 The Determinants of Capital Structure in Transitional Economies
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International Review of Economics and Finance 16 400-415
Didier T Hevia C and Schmukler SL 2011 How Resilient Were Emerging Economies to the Global Crisis World Bank Policy Research Working Paper No 5637
Estrin S and T Mickiewicz 2010 Entrepreneurship in Transition Economies The Role of
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Fraser S 2009 Small Firms in the Credit Crisis Evidence from the UK Survey of SME Finances Economic and Social Research Council Report Available at httpwww2warwickacukfacsocwbsresearchcsmeresearchlatestsmall_firms_in_the_credit_crisis_v3-oct09pdf Herbane B 2011 Small business research Time for a crisis-based view International Small
Business Journal 28(1)43ndash64
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Financing in Eastern Europe World Bank Policy Research Working Paper 2933
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27
Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
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Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
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Septmeber 2011
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28
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Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
10
same time as larger firms use more finance and tend to rely more on external funding they
may be hit harder by financial contraction in the situation of global crises when international
financial markets dry up so preventing larger firms from drawing upon them when required
They are also less flexible and it is more costly for them to restructure and downsize when
they are hit with external shocks Furthermore while SMEs tend to be more flexible in relying
on other sources of finance including trade credit contributed equity and informal finance
the financial structure of larger firms generally tends to be less diversified with a preference
often given to retained profits and bank finance following the pecking order theory Taken
together we may argue that both supply and demand for finance is more affected for larger
firms in the situation of external shocks
Based on the discussion presented in Sections 2 and 31 we further discuss three main
groups of factors which are likely to affect firmsrsquo perception of financial constraints and their
financing choice strategy These are as follows (1) firm size in general and in the period of
crisis (2) other firm- and industry-specific characteristics including foreign ownership export
orientation firmsrsquo social capital and the degree of competition and its pressure on the firm to
develop a new product and (3) country-level institutional parameters including the degree of
protection of property rights and the development of the financial sector
32 Size of the enterprise and the effect of crisis
With regards to the effect of firm size based on the general discussion in the literature
(see sections 2-31) we expect SMEs to be more financially constrained in their access to
external lending and respectively more reliant on internal funds This is due to insufficient
information that the bank can obtain about a particular SME as well as due to a potentially
lower size of collateral However this lower reliance of SMEs on external debt can potentially
be a source of flexibility during the crisis when formal financial markets dry up and when
even large well-established firms have difficulty obtaining bank credit Furthermore following
Atanasova and Wilson (2003 2004) Mateut et al (2006) and Klapper and Randall (2010) we
expect that under tight monetary conditions SMEs in transition economies are more likely to
switch to alternative forms of financing such as trade credit We also hypothesize that SMEs
are more likely to rely on ownersrsquo contributed equity which they tend to accumulate in good
times as part of their risk management strategy to use it as a cushion in the times of financial
distress In summary we expect the difference between the SMEs and large firms in their
reliance on bank finance to diminish during the crisis years and second SMEs to be more
flexible and rely more on other sources of finance such as trade credit and private equity in
the period of financial contractions
11
33 Firm- and industry- level factors
As far as the firm-level and industry-level variables are concerned we expect the
following results first the level of social capital of a firm as proxied by the inverse of the time
spent dealing with government regulations to indicate possible established connections with
public officials can positively affect its access to trade credit Next the industry-level
pressure on a firm from competitors to develop a new product may increase the firmrsquos
chances of obtaining a bank loan as the bank may perceive the firmrsquos operations as more
diversified and less risky (Isachenkova et al 2011) We also expect foreign competition and
the pressure it exerts on a firm innovation capability to play less important role for firm
financing decisions as SMEs are more likely to operate in market niches and they are
unlikely to compete with multinational enterprises In contrast we expect a pressure
originated from customers on a firm to innovate to increase a firmrsquos probability to rely more
on external sources of funding This may be attributed to the fact that a firm does not only
differentiate itself from other firms further with developing a new product but also assures a
demand for this product by responding to the needs of its existing customers The
guaranteed demand for a new product would be one of the most crucial factors taken into
account by bank managers or potential investors in decision-making concerning project
financing Thirdly international product certification may play a similar role with regards to
bank loans increasing the access to external funds Fourth we investigate the effect on the
choice of financing of the firm age with a square term Generally older firms may have
easier access to bank loans as more information is available about them to the lender (Beck
et al 2006 Canton et al 2010) however due to the particulars of the transition period
sometimes older firms may be less economically viable and unable to get a loan therefore
the sign of this coefficient is uncertain here Lastly we also look at the firmrsquos export
orientation which is expected to increase the reliance on bank lending and its ownership
type where we single out foreign and domestic private firms In the case of foreign firms
they are less likely to use private loans and rely instead on retained earnings and intra-
company funds transfers in the case of MNCs
34 Institutional environment
The impact of institutional variables on the financing choices of firms has been of the
utmost interest to economists and policy-makers during the period of transition (see for
example Stijn and Tzioumis 2006 Mitra et al 2008 see also Commander and Svejnar
(2009) for an in-depth and comprehensive analysis of the impact of various business
environment factors on firm performance using BEEPS 2002 - 2005 panel) In our analysis
12
we concentrate on two institutional factors the degree of protection of property rights and the
size of the formal financial sector which have been claimed to be of key importance for firmsrsquo
financing decisions (see Korosteleva and Mickiewicz (2011) for overview of the related
literature) As far as the property rights protection is concerned it is found to play crucial role
for firm growth and access to external finance (Aidis et al 2008 2010 Korosteleva and
Mickiewicz 2011 Estrin Korosteleva and Mickiewicz 2011) In the environment with weak
protection of property rights financial contracts are less likely to be concluded leading to the
underdevelopment of finance and credit rationing with small firms to be disproportionally
affected the most (Acemoglu and Johnson 2005) Beck et al (2004) show that in terms of
access to external finance small firms benefit disproportionally from higher levels of property
rights protection Lack of secure property rights may also discourage SMEs from taking full
advantage of opportunities to invest (Johnson et al 2002) In a survey of private small
manufacturing firms in Poland Russia Ukraine Romania and Slovakia Johnson et al
(2002) find that small firms tend to reinvest less of their earnings when they perceive their
property rights insecure They also find that the effect of the property rights system is of more
paramount importance for entrepreneursrsquo decisions to reinvest their earnings than availability
of formal finance Moreover if property rights are well-protected this lessens the extent of
potential threat of being expropriated by raidersbank lenders in an artificial bankruptcy
procedure which has been quite a significant issue for firms in Russia and other FSU states
(Radygin et al 2005 Sprenger 2002) Based on this we expect that strong property rights
are likely to encourage SMEs to use more debt as well as to use their own funds and
retained profits for investing in investment projects
With regards to the size of the formal finance as measured by the share of private
credit to GDP the relationship between financial depth and financial constraints has been
extensively studied (Beck et al 2006 also see for example Love 2003 who employing a
sample of 36 countries finds that financial development affects firmsrsquo investment by
increasing the availability of external finance) Financial intermediaries facilitate the risk
amelioration in the presence of problems created by information and transaction frictions by
developing expertise in risk assessment and in monitoring (Levine 1997 Barth et al 2006
Barth et al 2008) Developed financial institutions are found to be particularly beneficial for
small firms compared to large ones (Barth et al 2006 Beck et al 2005 2006 2008)
Pissarides et al (2003) show that financial constraints affect SMEs even more than
deficiency of the property rights protection Accordingly the size of the formal financial
system is expected to be positively related to the use of bank finance as a better functioning
financial system should help ease up borrowing constraints
4 Data and Methodology
13
41 Sample
To explore the determinants of the financial structure of small businesses we use the
2002-2009 Business Environment and Enterprise Performance Survey (BEEPS) data6 of
21867 firms covering 26 transition economies of Europe and Central Asia (ECA)7
The sample is primarily comprised of small and medium-sized businesses8 which
account for 893 per cent of the sample The sample is representative in terms of industrial
coverage with the majority of SMEs of the sample operating in manufacturing wholesale
and retailing industries
BEEPS dataset provides rich information on firm characteristics investment
behaviour and firmsrsquo perception of business environment including financial constraints
which are of a primary interest for our investigation of the effect of the recent financial crisis
on firmsrsquo perception of financial constraints Potentially we could use other micro-level data
characterising various domains of business environment captured by firmsrsquo perceptions for
investigating the effects of the institutional settings However using these micro-level
indicators as explanatory variables would make our study plagued with a problem of
endogeneity To avoid this we merge our firm-level data with country-level indicators
characterising various institutional domains The country level data were obtained from the
World Development Indicators (World Bank) and Polity IV databases (for further discussion
see below) Finally the BEEPs dataset contains other useful information which allows us to
shed light of the effect of for example social capital as proxied by the indirect measure of
possible connections with the authorities (see below for the definition of the variable) on firm
financing
42 Variable Definition and Measurement
Explanatory variables
6 This data is a joint project of the European Bank for Reconstruction and Development and World Bank The first survey was launched in 1999 The dataset used in the present study is an unbalanced panel covering the years of 2002 2005 2007-2009 7 The sample includes the following countries Albania Armenia Azerbaijan Belarus Bosnia Bulgaria Croatia Czech Republic Estonia FYROM Georgia Hungary Kazakhstan Kyrgyzstan Latvia Lithuania Moldova Montenegro Poland Romania Russia Serbia Slovakia Slovenia Tajikistan and Ukraine We exclude Uzbekistan as an outlier from our sample We also exclude Turkey as it is not classified as a post-communist country undertaking transition from a planned to a market economy 8 We utilize the EU employment criterion to define small and medium-sized businesses More specifically businesses are defined as micro if they employ 9 and less employees small ndash between 10 and 49 medium ndash between 50 and 249 and large ndash over 250 employees Respectively SMEs are defined as firms employing less than 249 firms
14
To test our main hypothesis of the effect of a firm size on firmsrsquo perception of financial
constraints we introduce a dummy variable denoting small and medium-sized business
coded as 1 if firms are classified as small or medium-sized businesses according to the EU
definition based on the employment criterion For robustness of our results we also use a
continuous variable denoting a size of employment as measured by the natural logarithm of
employment9 The obtained results are consistent with the ones using the SME indicators
To capture the effect of the recent financial crisis we introduce a crisis dummy coded
as 1 if the year of survey is equal to 2008 or 200910
We also introduce a number of firm-level controls which include age of firm11 type of
ownership including private and foreign ownership export orientation and whether a firm
has an internationally certified product all equal to 1 if a business has a respectively listed
characteristic and zero otherwise We also examine the effect of various sources of pressure
on firms to innovate ndash the indicators which are considered to be important for firm investment
decisions Respectively the pressure for innovation may stem from domestic competition
foreign competition and customers To capture the effect of a firmrsquos social capital we
introduce an indicator which indirectly may capture some possible connections of a firm with
authorities It is proxied by time spent by each firm on dealing with government regulations
We assume the less time firms spend dealing with government regulations the more likely
they have some established connections with public officials which allow them to avoid
burdensome regulation procedures
In our study we also introduce a number of country-level variables which characterize
the institutional environment in the countries covered by our sample More specifically we
include an indicator of the financial development as measured by the ratio of domestic credit
to private sector to GDP (one year lag to avoid potential endogeneity) obtained from the
World Bank World Development Indicators (World Bank 2011) This measure has been used
in previous studies (Klapper et al 2006) and it is expected to be of a primary importance for
transition economies where firms tend to rely more on bank finance rather than capital
markets We also introduce a measure of property rights protection (a one year lag) proxied
by the indicator of effective constraints imposed on the executive branch of the government
and obtained from Polity IV project12 This measure of property rights protection is
9 These results are not reported here to save some space However they can be obtained from authors upon request 10 Here it is important to note that although the financial crisis has started in 2007 in the USA it spread to transition economies in 2008-2009 11 Some studies find a non-monotonic relationship between age and firm decision-making In this study we introduce a squared term of age along with a age variable to capture this possible non-linearity 12 Available from httpwwwsystemicpeaceorgpolitypolity4htm
15
considered to be superior to other indicators including the index of property rights reported
by the Heritage Foundation ndashWall Street Journal (for further discussion see Acemoglu and
Johnson 2005 Glaeser et al 2004 Estrin Korosteleva and Mickieiwcz 2011)
In the present study we also introduce macroeconomic controls including cyclical
economic performance as measured by the one year lag of the GDP annual growth rate
and the level of economic development as proxied by a set of GDP pc dummies denoting
the five quintiles of its distribution to address the problem of potential multicollinearity with the
measure of financial development
Finally we include industry and country controls in all our specifications Introducing
country dummies into analysis allows to control for cross-country heterogeneity
For further definition of all variables their descriptive statistics and correlation matrix
see Tables 1-2
43 Dependent variables
To investigate the effect of a firmrsquos size on its perception of financial constraints we
construct a dummy variable coded as 1 capturing a major and very severe obstacle for
access to finance and 0 otherwise
The firm financing choices are defined by the five individual dependent variables
associated with tobit financial choice equations in the seemingly unrelated regression
equations model
One important thing to mention here is the inability to distinguish between
owninternal funds and external private equity considered as one of the limitations of the
2002-2009 BEEPS dataset In the period under investigation BEEPS offers two questions
which aim to capture the use of equity The first one centres around retained earnings and
the second one shows ownersrsquo contributions and private equity or issued new equity
Following some theoretical considerations discussed in sections 2 and 3 in the context of
SMEs we expect the second element of equity to be primarily comprised of existing ownersrsquo
new contributions rather than private equity
Thus the indicator of financial choices represents a set of five individual dependent
variables including retained earnings contributed earnings private borrowing informal
finance trade credit with each of them constructed as a share in total financing of SMErsquos
investment decisions (see Table 1)
44 Methods
16
In this study we employ a number of estimators to obtain robust results More
specifically we use a probit model to investigate the effect of a firm size and the recent
financial crisis on firmsrsquo perception of financial constraints The effect of a firm size in the
situation of crisis is captured by the introduction of the interaction term between firm size as
proxied by the SME indicator and a financial crisis dummy
We further employ the seemingly unrelated regression equations model combined
with the tobit approach for studying firmsrsquo financial structure
Probit model of perception of financial constraints
In the probit model the probability of a firmrsquos perception of financial constraints as
major(j = 1) can be written as follows
( ) ( )int ++
++
infinminus
minus===
ijitj uXjitiitit ijitjuXjy uX
βα βαππ 212-
)()(2 21exp|Pr
Where ity is our measure of financial constraints as perceived by firms and itX is a
set of our explanatory variables discussed in detail in sections 3-4 Here it is important to
note that the interaction term in a probit model cannot be interpreted in a similar way as in
linear models and disregarding this may lead to misleading estimates of the interaction
effect which is of crucial importance for our study (Norton Wang and Ai 2004) Respectively
for robustness of our results here we follow the framework suggested by Norton Wang and
Ai (2004) to account for the model nonlinearity The adjusted marginal effects for the
interaction term are reported in the note to Table 313
Simultaneous Model of Financing Choices
As mentioned above we next model the choice of all five financing choices explicitly
We also hypothesise (following Isachenkova et al 2011) that firm financing choices are likely
to be determined jointly A standard way of modelling jointly determined indicators is a
system of equations - SURE ndash seemingly unrelated regression equations where equations
are linked only by their errors (Zellner 1962) We therefore model the five types of sources of
finance (internal funds private bank borrowing informal finance trade credit and private
13 We also run a probit regression for a split sample of (1) SMEs and (2) large firms to check the robustness of our results (based on the interaction term) while addressing a problem of multicollinearity between a crisis variable and its interaction term with a SME variable The correlation coefficient between a crisis variable and its interaction term with a SME variable is equal to 93 This can be attributed by the problem of a sample being overrepresented by SMEs which constitute 90 of all surveyed firms The results remain robust and can be available from authors upon request
17
equity) using a SURE framework within which we specify a set of five tobit regressions with
correlated residuals
We employ the STATA cmp module which allows to it Seemingly Unrelated Regressions
using the simulated likelihood method such as the Geweke Hajivassiliou and Keane (GHK)
algorithm (for further discussion see Roodman 2008) We utilise a tobit equation to model
each individual financial choice of firms because our dependent financing choices variables
are continuous but their range is constrained (censored) with a substantial number of
observations either equal to zero denoting those who do not use the respective source of
finance or to 100 showing the opposite Other observations are positive and may produce
many different outcomes (Verbeek 2000) Each tobit equation uses a set of identical
explanatory variables that proxy factors which could possibly be associated with firmrsquos
financing choices including industry and country dummies
We also considered the bias caused by potential interdependence between the choice of
whether to invest and firmrsquos financing choices We accounted for the potential selection bias
by introducing into the financial choices SURE Tobit equations (second stage outcome
equations14) the inverse Millrsquos ratio calculated based on modelling the choice to invest in
fixed assets (first stage or selection equation) To identify the first stage of the Heckman
selection model we chose a variable which is correlated with the first stage dependent
variable (investment decision) but not with the second ones (financing choices) We used the
rate of capacity utilization as part of our identification strategy Capacity utilization shows the
percentage of capital stock in use the higher is the rate the more likely firms will increase
investment Batyaeva and Aukutsionek (2001) show that the rate of capacity utilization is
higher in the group of investing firms than in the group of non-investing firms in Russia15 We
calculated the inverse Millrsquos ratio based on the above selection equation16 and included it as
a control in the second stage SURE Tobit equations The inverse Millrsquos ratio has only proved
to be statistically significant in the private bank loan equation pointing to the potential
selection bias arising from the possibility that the factors determining the decision to invest
might differ from those determining the use of bank financing in purchasing fixed assets
14 We also attempted to estimate an investment equation jointly with Tobit financial choices equations within the SURE framework using However given the overall complexity of the model we failed to do this We proceeded further with a two-stage approach by estimating an investment probit equation and calculating the inverse Millrsquos ratio that we add into the outcome financial choices equations at the second stage of the analysis to test for the selection bias 15 We performed an independent sample t-test to check whether the rate of capacity utilization is statistically significantly higher for investing firms compared to non-investing firms for our sample The null hypothesis of no difference was rejected at 1 level of significance 16 To economize on space we do not report the results of the investment probit equation but they are available from authorsrsquo upon request
18
Finally In Table 6 we attempt to condition the determinants of financing constraints
declared by SMEs on the relative percentage increase of trade credit in total funds used for
real investment As mentioned above in Section 2 the timings of measuring the composition
of financing sources precede by a year the timings of measuring the perceptions of financing
constraints That feature of the BEEPSrsquo design allays a likely concern about the endogeneity
of the relative proportion of trade credit and enables causal inference We too report in thre
note to Table 4 the adjusted marginal effects for the interaction term of the SME dummy with
the trade credit variable
In the next section we discuss our empirical results
5 Empirical Results
Table 3 reports the results of the probit model with the marginal effects for firmsrsquo
perception of financial constraints while Tables 4-5 summarize the results of SURE tobits for
a more detailed breakdown of five financing choices More specifically Table 4 reports the
results based on the whole sample to give a comparative perspective on SMErsquos financing
strategy vis-a-vis large businesses whereas Table 5 reports the results based on a
subsample of small and medium-sized firms to shed some light on their financing choices in
the period of crisis
Perception of financial constraints
Table 3 shows that generally small and medium-sized enterprises feel more financially
constrained with the coefficient for SME dummy in relation to the large firms being positive
and significant which is consistent with our discussion in sections 2-3 However the
coefficient of the interaction term with the Crisis dummy turns out to be negative and
significant in relation to the perception of financial constraints as a major obstacle and it
tends to outweigh the effect of a SME dummy when we calculate marginal effects The effect
of the interaction terms with the crisis remains robust after we adjust for non-linearity using
the framework proposed by Norton Wang and Ai (2004)17 Overall these results confirm
that small and medium-sized enterprises are much less financially constrained during the
crisis years with their perceptions close to those of the large firms This result is a polar
opposite to that obtained for the SMEs in the UK (Fraser 2009) which finds that not only do
SMEs generally feel more financially constrained but they report to be even more so during
17 We also check the robustness of our results to the potential problem of multicollinearity between a crisis dummy and its interaction term with SME by splitting a sample and testing the same specification separately for SMEs and large firms We also perform another robustness check by breaking a SME dummy into three subsequent dummies namely micro- small- and medium-sized firms The difference in perception of financial constraints gets almost eliminated in the case of small firms and is largely reduced in the case of micro firms whereas it is less so for medium-sized firms
19
the last crisis We could explain this striking difference by the peculiarities of the SMEs
functioning in new emerging economies The lower reliance of SMEs on external debt in
good times (as shown by results which are discussed below) gives SMEs some flexibility
during the crisis when formal financial markets dry up Jointly with overall flexibility to make
necessary cost cuts and to restructure a business this overall lower reliance on external
funding and the use of alternative sources of financing makes SMEs feel less financially
constrained under the crisis as compared to larger firms
We also find that a more developed financial sector as proxied by domestic private
credit as proportion of GDP helps ease up financial constraints This is in line with the
general literature suggesting that better functioning financial intermediaries facilitate the risk
amelioration in the presence of problems created by market frictions (Levine 1997 Barth et
al 2006 Barth et al 2008)
Unfortunately we fail to find any significant effect of the property rights protection on
firmsrsquo perception of financial constraints that may be explained by the fact that the effect of a
more developed financial sector is likely to outweigh the effect of the property rights
protection
Finally we also find that foreign ownership and international product certificate may
reduce firmsrsquo borrowing constraints while any pressure from domestic or foreign competition
so is pressure from the customers to innovate will increase firmrsquos perception of financial
constraints as major given that firms envisage the need to secure external funding for RampD
or any other innovation-related activities
Financing choices for investment in fixed assets
The results in Table 4 indicate that small enterprises tend to rely more on internal funds
and less on bank loans but they are no different from larger firms in respect of using informal
funds trade credit or private equity which is generally consistent with our discussion in
Sections 2 and 3 The results of Table 5 suggest however that under crisis small and
medium-sized firms tend to switch to other sources of finance such as trade credit and
ownerrsquos contributed equity and to respectively reduce the reliance on retained earnings
perhaps because they decrease due to the negative impact of crisis internal funds With
regards to our discussion of SMEsrsquo risk management we note that the use of private equity
(ownerrsquos contribution) during the crisis years increases which could indicate that the ownerrsquos
funds are used as a cushion in the period of financial distress
An interesting insight regarding the use of trade credit emerges for SMEs in our
sample although in non-crisis years small and medium-sized businesses are not significantly
different from larger firms in terms of reliance on trade credit SMEs tend to finance a
significantly higher proportion of their fixed asset investment by trade credit than large firms
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Aidis R Estrin S Mickiewicz T 2010 Size matters entrepreneurial entry and
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Arnold G 2008 Corporate Financial Management 4th Edition Prentice Hall
Atanasova and Wilson 2003 Bank Borrowing Constraints and the Demand for Trade Credit
Evidence from Panel Data Managerial and Decision Economics Special Issue The
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Barth J G Caprio and R Levine 2006 Rethinking Bank Regulation Till Angels Govern
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Beck T A Demirguumlccedil-Kunt L Laeven and V Maksimovic (2006) ldquoThe Determinants of
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Beck T A Demirguumlccedil-Kunt and V Maksimovic 2008 ldquoFinancial Patterns Around the World
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Berger A amp G Udell 1998 The Economics of Small Business Finance The Role of
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and Finance 22 613ndash73
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Policy Transmission NBER Working Papers 5146 National Bureau of Economic Research
Inc
Bernanke B M Gertler amp S Gilchrist 1998 The Financial Accelerator in a Quantitative
Business Cycle Framework in Taylor J amp M Woodford (ed) 1999 Handbook of
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Bevan A and J Danbolt 2002 Capital structure and its determinants in the UK - a
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Chakraborty I 2008 Capital Structure in Emerging Stock Market The Case of India
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Cull R and L C Xu 2007 Formal Finance and Trade Credit during Chinarsquos Transition
World Bank Policy Research Working Paper 4204
De La Torre AM Peria and S Schmukler 2008 Bank Involvement with SMEs Beyond
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Delcoure N 2007 The Determinants of Capital Structure in Transitional Economies
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International Review of Economics and Finance 16 400-415
Didier T Hevia C and Schmukler SL 2011 How Resilient Were Emerging Economies to the Global Crisis World Bank Policy Research Working Paper No 5637
Estrin S and T Mickiewicz 2010 Entrepreneurship in Transition Economies The Role of
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httpftpizaorgdp5481pdf
Ge Y and J Qiu 2007 Financial Development Bank Discrimination and Trade Credit
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Fraser S 2009 Small Firms in the Credit Crisis Evidence from the UK Survey of SME Finances Economic and Social Research Council Report Available at httpwww2warwickacukfacsocwbsresearchcsmeresearchlatestsmall_firms_in_the_credit_crisis_v3-oct09pdf Herbane B 2011 Small business research Time for a crisis-based view International Small
Business Journal 28(1)43ndash64
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Financing in Eastern Europe World Bank Policy Research Working Paper 2933
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Financingrdquo World Bank Group Enterprise note No 13Korosteleva J and Mickiewicz T
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Economics and Statistics 42 (4 ) (Nov 1960) 429-437
Mitra P amp Muravyev A amp M Schaffer 2008 Convergence in Institutions and Market
Outcomes Cross-Country and Time-Series Evidence from the BEEPS Surveys in Transition
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Markets Review 6 138-169
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27
Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
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Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
Small- and Medium-sized Businesses in Central and Eastern Europe Journal of Business
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Pissarides F 2001 Financial Structure to Promote Private Sector Development in South-
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Evidence from Small and Medium Size Enterprises in Russia and Bulgaria Journal of
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Radygin A D A E Gontmakher M G Kuzyk I V Mezheraup H Swain Yu V
Simachiov N A Shmeleva and R M Entov 2005 The institution of Bankruptcy
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Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
Roodman D 2009 Estimating Fully Observed Recursive Mixed-Process Models with cmp CGD Working Paper 168 Washington DC Center for Global Development Sprenger C 2002 ldquoOwnership and Corporate Governance in Russian Industry a Surveyrdquo
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Stijn Claessens and Konstantinos Tzioumis 2006 Measuring firmsrsquo access to finance
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28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
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International University of Manchester DOI httpdxdoiorg105257wbwdi2011-09
Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
11
33 Firm- and industry- level factors
As far as the firm-level and industry-level variables are concerned we expect the
following results first the level of social capital of a firm as proxied by the inverse of the time
spent dealing with government regulations to indicate possible established connections with
public officials can positively affect its access to trade credit Next the industry-level
pressure on a firm from competitors to develop a new product may increase the firmrsquos
chances of obtaining a bank loan as the bank may perceive the firmrsquos operations as more
diversified and less risky (Isachenkova et al 2011) We also expect foreign competition and
the pressure it exerts on a firm innovation capability to play less important role for firm
financing decisions as SMEs are more likely to operate in market niches and they are
unlikely to compete with multinational enterprises In contrast we expect a pressure
originated from customers on a firm to innovate to increase a firmrsquos probability to rely more
on external sources of funding This may be attributed to the fact that a firm does not only
differentiate itself from other firms further with developing a new product but also assures a
demand for this product by responding to the needs of its existing customers The
guaranteed demand for a new product would be one of the most crucial factors taken into
account by bank managers or potential investors in decision-making concerning project
financing Thirdly international product certification may play a similar role with regards to
bank loans increasing the access to external funds Fourth we investigate the effect on the
choice of financing of the firm age with a square term Generally older firms may have
easier access to bank loans as more information is available about them to the lender (Beck
et al 2006 Canton et al 2010) however due to the particulars of the transition period
sometimes older firms may be less economically viable and unable to get a loan therefore
the sign of this coefficient is uncertain here Lastly we also look at the firmrsquos export
orientation which is expected to increase the reliance on bank lending and its ownership
type where we single out foreign and domestic private firms In the case of foreign firms
they are less likely to use private loans and rely instead on retained earnings and intra-
company funds transfers in the case of MNCs
34 Institutional environment
The impact of institutional variables on the financing choices of firms has been of the
utmost interest to economists and policy-makers during the period of transition (see for
example Stijn and Tzioumis 2006 Mitra et al 2008 see also Commander and Svejnar
(2009) for an in-depth and comprehensive analysis of the impact of various business
environment factors on firm performance using BEEPS 2002 - 2005 panel) In our analysis
12
we concentrate on two institutional factors the degree of protection of property rights and the
size of the formal financial sector which have been claimed to be of key importance for firmsrsquo
financing decisions (see Korosteleva and Mickiewicz (2011) for overview of the related
literature) As far as the property rights protection is concerned it is found to play crucial role
for firm growth and access to external finance (Aidis et al 2008 2010 Korosteleva and
Mickiewicz 2011 Estrin Korosteleva and Mickiewicz 2011) In the environment with weak
protection of property rights financial contracts are less likely to be concluded leading to the
underdevelopment of finance and credit rationing with small firms to be disproportionally
affected the most (Acemoglu and Johnson 2005) Beck et al (2004) show that in terms of
access to external finance small firms benefit disproportionally from higher levels of property
rights protection Lack of secure property rights may also discourage SMEs from taking full
advantage of opportunities to invest (Johnson et al 2002) In a survey of private small
manufacturing firms in Poland Russia Ukraine Romania and Slovakia Johnson et al
(2002) find that small firms tend to reinvest less of their earnings when they perceive their
property rights insecure They also find that the effect of the property rights system is of more
paramount importance for entrepreneursrsquo decisions to reinvest their earnings than availability
of formal finance Moreover if property rights are well-protected this lessens the extent of
potential threat of being expropriated by raidersbank lenders in an artificial bankruptcy
procedure which has been quite a significant issue for firms in Russia and other FSU states
(Radygin et al 2005 Sprenger 2002) Based on this we expect that strong property rights
are likely to encourage SMEs to use more debt as well as to use their own funds and
retained profits for investing in investment projects
With regards to the size of the formal finance as measured by the share of private
credit to GDP the relationship between financial depth and financial constraints has been
extensively studied (Beck et al 2006 also see for example Love 2003 who employing a
sample of 36 countries finds that financial development affects firmsrsquo investment by
increasing the availability of external finance) Financial intermediaries facilitate the risk
amelioration in the presence of problems created by information and transaction frictions by
developing expertise in risk assessment and in monitoring (Levine 1997 Barth et al 2006
Barth et al 2008) Developed financial institutions are found to be particularly beneficial for
small firms compared to large ones (Barth et al 2006 Beck et al 2005 2006 2008)
Pissarides et al (2003) show that financial constraints affect SMEs even more than
deficiency of the property rights protection Accordingly the size of the formal financial
system is expected to be positively related to the use of bank finance as a better functioning
financial system should help ease up borrowing constraints
4 Data and Methodology
13
41 Sample
To explore the determinants of the financial structure of small businesses we use the
2002-2009 Business Environment and Enterprise Performance Survey (BEEPS) data6 of
21867 firms covering 26 transition economies of Europe and Central Asia (ECA)7
The sample is primarily comprised of small and medium-sized businesses8 which
account for 893 per cent of the sample The sample is representative in terms of industrial
coverage with the majority of SMEs of the sample operating in manufacturing wholesale
and retailing industries
BEEPS dataset provides rich information on firm characteristics investment
behaviour and firmsrsquo perception of business environment including financial constraints
which are of a primary interest for our investigation of the effect of the recent financial crisis
on firmsrsquo perception of financial constraints Potentially we could use other micro-level data
characterising various domains of business environment captured by firmsrsquo perceptions for
investigating the effects of the institutional settings However using these micro-level
indicators as explanatory variables would make our study plagued with a problem of
endogeneity To avoid this we merge our firm-level data with country-level indicators
characterising various institutional domains The country level data were obtained from the
World Development Indicators (World Bank) and Polity IV databases (for further discussion
see below) Finally the BEEPs dataset contains other useful information which allows us to
shed light of the effect of for example social capital as proxied by the indirect measure of
possible connections with the authorities (see below for the definition of the variable) on firm
financing
42 Variable Definition and Measurement
Explanatory variables
6 This data is a joint project of the European Bank for Reconstruction and Development and World Bank The first survey was launched in 1999 The dataset used in the present study is an unbalanced panel covering the years of 2002 2005 2007-2009 7 The sample includes the following countries Albania Armenia Azerbaijan Belarus Bosnia Bulgaria Croatia Czech Republic Estonia FYROM Georgia Hungary Kazakhstan Kyrgyzstan Latvia Lithuania Moldova Montenegro Poland Romania Russia Serbia Slovakia Slovenia Tajikistan and Ukraine We exclude Uzbekistan as an outlier from our sample We also exclude Turkey as it is not classified as a post-communist country undertaking transition from a planned to a market economy 8 We utilize the EU employment criterion to define small and medium-sized businesses More specifically businesses are defined as micro if they employ 9 and less employees small ndash between 10 and 49 medium ndash between 50 and 249 and large ndash over 250 employees Respectively SMEs are defined as firms employing less than 249 firms
14
To test our main hypothesis of the effect of a firm size on firmsrsquo perception of financial
constraints we introduce a dummy variable denoting small and medium-sized business
coded as 1 if firms are classified as small or medium-sized businesses according to the EU
definition based on the employment criterion For robustness of our results we also use a
continuous variable denoting a size of employment as measured by the natural logarithm of
employment9 The obtained results are consistent with the ones using the SME indicators
To capture the effect of the recent financial crisis we introduce a crisis dummy coded
as 1 if the year of survey is equal to 2008 or 200910
We also introduce a number of firm-level controls which include age of firm11 type of
ownership including private and foreign ownership export orientation and whether a firm
has an internationally certified product all equal to 1 if a business has a respectively listed
characteristic and zero otherwise We also examine the effect of various sources of pressure
on firms to innovate ndash the indicators which are considered to be important for firm investment
decisions Respectively the pressure for innovation may stem from domestic competition
foreign competition and customers To capture the effect of a firmrsquos social capital we
introduce an indicator which indirectly may capture some possible connections of a firm with
authorities It is proxied by time spent by each firm on dealing with government regulations
We assume the less time firms spend dealing with government regulations the more likely
they have some established connections with public officials which allow them to avoid
burdensome regulation procedures
In our study we also introduce a number of country-level variables which characterize
the institutional environment in the countries covered by our sample More specifically we
include an indicator of the financial development as measured by the ratio of domestic credit
to private sector to GDP (one year lag to avoid potential endogeneity) obtained from the
World Bank World Development Indicators (World Bank 2011) This measure has been used
in previous studies (Klapper et al 2006) and it is expected to be of a primary importance for
transition economies where firms tend to rely more on bank finance rather than capital
markets We also introduce a measure of property rights protection (a one year lag) proxied
by the indicator of effective constraints imposed on the executive branch of the government
and obtained from Polity IV project12 This measure of property rights protection is
9 These results are not reported here to save some space However they can be obtained from authors upon request 10 Here it is important to note that although the financial crisis has started in 2007 in the USA it spread to transition economies in 2008-2009 11 Some studies find a non-monotonic relationship between age and firm decision-making In this study we introduce a squared term of age along with a age variable to capture this possible non-linearity 12 Available from httpwwwsystemicpeaceorgpolitypolity4htm
15
considered to be superior to other indicators including the index of property rights reported
by the Heritage Foundation ndashWall Street Journal (for further discussion see Acemoglu and
Johnson 2005 Glaeser et al 2004 Estrin Korosteleva and Mickieiwcz 2011)
In the present study we also introduce macroeconomic controls including cyclical
economic performance as measured by the one year lag of the GDP annual growth rate
and the level of economic development as proxied by a set of GDP pc dummies denoting
the five quintiles of its distribution to address the problem of potential multicollinearity with the
measure of financial development
Finally we include industry and country controls in all our specifications Introducing
country dummies into analysis allows to control for cross-country heterogeneity
For further definition of all variables their descriptive statistics and correlation matrix
see Tables 1-2
43 Dependent variables
To investigate the effect of a firmrsquos size on its perception of financial constraints we
construct a dummy variable coded as 1 capturing a major and very severe obstacle for
access to finance and 0 otherwise
The firm financing choices are defined by the five individual dependent variables
associated with tobit financial choice equations in the seemingly unrelated regression
equations model
One important thing to mention here is the inability to distinguish between
owninternal funds and external private equity considered as one of the limitations of the
2002-2009 BEEPS dataset In the period under investigation BEEPS offers two questions
which aim to capture the use of equity The first one centres around retained earnings and
the second one shows ownersrsquo contributions and private equity or issued new equity
Following some theoretical considerations discussed in sections 2 and 3 in the context of
SMEs we expect the second element of equity to be primarily comprised of existing ownersrsquo
new contributions rather than private equity
Thus the indicator of financial choices represents a set of five individual dependent
variables including retained earnings contributed earnings private borrowing informal
finance trade credit with each of them constructed as a share in total financing of SMErsquos
investment decisions (see Table 1)
44 Methods
16
In this study we employ a number of estimators to obtain robust results More
specifically we use a probit model to investigate the effect of a firm size and the recent
financial crisis on firmsrsquo perception of financial constraints The effect of a firm size in the
situation of crisis is captured by the introduction of the interaction term between firm size as
proxied by the SME indicator and a financial crisis dummy
We further employ the seemingly unrelated regression equations model combined
with the tobit approach for studying firmsrsquo financial structure
Probit model of perception of financial constraints
In the probit model the probability of a firmrsquos perception of financial constraints as
major(j = 1) can be written as follows
( ) ( )int ++
++
infinminus
minus===
ijitj uXjitiitit ijitjuXjy uX
βα βαππ 212-
)()(2 21exp|Pr
Where ity is our measure of financial constraints as perceived by firms and itX is a
set of our explanatory variables discussed in detail in sections 3-4 Here it is important to
note that the interaction term in a probit model cannot be interpreted in a similar way as in
linear models and disregarding this may lead to misleading estimates of the interaction
effect which is of crucial importance for our study (Norton Wang and Ai 2004) Respectively
for robustness of our results here we follow the framework suggested by Norton Wang and
Ai (2004) to account for the model nonlinearity The adjusted marginal effects for the
interaction term are reported in the note to Table 313
Simultaneous Model of Financing Choices
As mentioned above we next model the choice of all five financing choices explicitly
We also hypothesise (following Isachenkova et al 2011) that firm financing choices are likely
to be determined jointly A standard way of modelling jointly determined indicators is a
system of equations - SURE ndash seemingly unrelated regression equations where equations
are linked only by their errors (Zellner 1962) We therefore model the five types of sources of
finance (internal funds private bank borrowing informal finance trade credit and private
13 We also run a probit regression for a split sample of (1) SMEs and (2) large firms to check the robustness of our results (based on the interaction term) while addressing a problem of multicollinearity between a crisis variable and its interaction term with a SME variable The correlation coefficient between a crisis variable and its interaction term with a SME variable is equal to 93 This can be attributed by the problem of a sample being overrepresented by SMEs which constitute 90 of all surveyed firms The results remain robust and can be available from authors upon request
17
equity) using a SURE framework within which we specify a set of five tobit regressions with
correlated residuals
We employ the STATA cmp module which allows to it Seemingly Unrelated Regressions
using the simulated likelihood method such as the Geweke Hajivassiliou and Keane (GHK)
algorithm (for further discussion see Roodman 2008) We utilise a tobit equation to model
each individual financial choice of firms because our dependent financing choices variables
are continuous but their range is constrained (censored) with a substantial number of
observations either equal to zero denoting those who do not use the respective source of
finance or to 100 showing the opposite Other observations are positive and may produce
many different outcomes (Verbeek 2000) Each tobit equation uses a set of identical
explanatory variables that proxy factors which could possibly be associated with firmrsquos
financing choices including industry and country dummies
We also considered the bias caused by potential interdependence between the choice of
whether to invest and firmrsquos financing choices We accounted for the potential selection bias
by introducing into the financial choices SURE Tobit equations (second stage outcome
equations14) the inverse Millrsquos ratio calculated based on modelling the choice to invest in
fixed assets (first stage or selection equation) To identify the first stage of the Heckman
selection model we chose a variable which is correlated with the first stage dependent
variable (investment decision) but not with the second ones (financing choices) We used the
rate of capacity utilization as part of our identification strategy Capacity utilization shows the
percentage of capital stock in use the higher is the rate the more likely firms will increase
investment Batyaeva and Aukutsionek (2001) show that the rate of capacity utilization is
higher in the group of investing firms than in the group of non-investing firms in Russia15 We
calculated the inverse Millrsquos ratio based on the above selection equation16 and included it as
a control in the second stage SURE Tobit equations The inverse Millrsquos ratio has only proved
to be statistically significant in the private bank loan equation pointing to the potential
selection bias arising from the possibility that the factors determining the decision to invest
might differ from those determining the use of bank financing in purchasing fixed assets
14 We also attempted to estimate an investment equation jointly with Tobit financial choices equations within the SURE framework using However given the overall complexity of the model we failed to do this We proceeded further with a two-stage approach by estimating an investment probit equation and calculating the inverse Millrsquos ratio that we add into the outcome financial choices equations at the second stage of the analysis to test for the selection bias 15 We performed an independent sample t-test to check whether the rate of capacity utilization is statistically significantly higher for investing firms compared to non-investing firms for our sample The null hypothesis of no difference was rejected at 1 level of significance 16 To economize on space we do not report the results of the investment probit equation but they are available from authorsrsquo upon request
18
Finally In Table 6 we attempt to condition the determinants of financing constraints
declared by SMEs on the relative percentage increase of trade credit in total funds used for
real investment As mentioned above in Section 2 the timings of measuring the composition
of financing sources precede by a year the timings of measuring the perceptions of financing
constraints That feature of the BEEPSrsquo design allays a likely concern about the endogeneity
of the relative proportion of trade credit and enables causal inference We too report in thre
note to Table 4 the adjusted marginal effects for the interaction term of the SME dummy with
the trade credit variable
In the next section we discuss our empirical results
5 Empirical Results
Table 3 reports the results of the probit model with the marginal effects for firmsrsquo
perception of financial constraints while Tables 4-5 summarize the results of SURE tobits for
a more detailed breakdown of five financing choices More specifically Table 4 reports the
results based on the whole sample to give a comparative perspective on SMErsquos financing
strategy vis-a-vis large businesses whereas Table 5 reports the results based on a
subsample of small and medium-sized firms to shed some light on their financing choices in
the period of crisis
Perception of financial constraints
Table 3 shows that generally small and medium-sized enterprises feel more financially
constrained with the coefficient for SME dummy in relation to the large firms being positive
and significant which is consistent with our discussion in sections 2-3 However the
coefficient of the interaction term with the Crisis dummy turns out to be negative and
significant in relation to the perception of financial constraints as a major obstacle and it
tends to outweigh the effect of a SME dummy when we calculate marginal effects The effect
of the interaction terms with the crisis remains robust after we adjust for non-linearity using
the framework proposed by Norton Wang and Ai (2004)17 Overall these results confirm
that small and medium-sized enterprises are much less financially constrained during the
crisis years with their perceptions close to those of the large firms This result is a polar
opposite to that obtained for the SMEs in the UK (Fraser 2009) which finds that not only do
SMEs generally feel more financially constrained but they report to be even more so during
17 We also check the robustness of our results to the potential problem of multicollinearity between a crisis dummy and its interaction term with SME by splitting a sample and testing the same specification separately for SMEs and large firms We also perform another robustness check by breaking a SME dummy into three subsequent dummies namely micro- small- and medium-sized firms The difference in perception of financial constraints gets almost eliminated in the case of small firms and is largely reduced in the case of micro firms whereas it is less so for medium-sized firms
19
the last crisis We could explain this striking difference by the peculiarities of the SMEs
functioning in new emerging economies The lower reliance of SMEs on external debt in
good times (as shown by results which are discussed below) gives SMEs some flexibility
during the crisis when formal financial markets dry up Jointly with overall flexibility to make
necessary cost cuts and to restructure a business this overall lower reliance on external
funding and the use of alternative sources of financing makes SMEs feel less financially
constrained under the crisis as compared to larger firms
We also find that a more developed financial sector as proxied by domestic private
credit as proportion of GDP helps ease up financial constraints This is in line with the
general literature suggesting that better functioning financial intermediaries facilitate the risk
amelioration in the presence of problems created by market frictions (Levine 1997 Barth et
al 2006 Barth et al 2008)
Unfortunately we fail to find any significant effect of the property rights protection on
firmsrsquo perception of financial constraints that may be explained by the fact that the effect of a
more developed financial sector is likely to outweigh the effect of the property rights
protection
Finally we also find that foreign ownership and international product certificate may
reduce firmsrsquo borrowing constraints while any pressure from domestic or foreign competition
so is pressure from the customers to innovate will increase firmrsquos perception of financial
constraints as major given that firms envisage the need to secure external funding for RampD
or any other innovation-related activities
Financing choices for investment in fixed assets
The results in Table 4 indicate that small enterprises tend to rely more on internal funds
and less on bank loans but they are no different from larger firms in respect of using informal
funds trade credit or private equity which is generally consistent with our discussion in
Sections 2 and 3 The results of Table 5 suggest however that under crisis small and
medium-sized firms tend to switch to other sources of finance such as trade credit and
ownerrsquos contributed equity and to respectively reduce the reliance on retained earnings
perhaps because they decrease due to the negative impact of crisis internal funds With
regards to our discussion of SMEsrsquo risk management we note that the use of private equity
(ownerrsquos contribution) during the crisis years increases which could indicate that the ownerrsquos
funds are used as a cushion in the period of financial distress
An interesting insight regarding the use of trade credit emerges for SMEs in our
sample although in non-crisis years small and medium-sized businesses are not significantly
different from larger firms in terms of reliance on trade credit SMEs tend to finance a
significantly higher proportion of their fixed asset investment by trade credit than large firms
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Worse Working Paper Series 4646 World Bank Washington DC
Bates T 1997 Financial Business Creation The Case of Chinese and Korean Immigrant
Entrepreneurs Journal of Business Venturing 12109-124
Batyaeva A and S Aukutsionek (2001) Investment and Non-Investment in the Russian
Industry Journal of East-West Business 6(4) 5-22
Beck T and A de la Torre 2006 The basic analytics of access to financial services World
Bank Research Paper
Beck T A Demirguumlccedil-Kunt and V Maksimovic 2004 Financing patterns around the world
Are small firms different World Bank working paper
Beck T A Demirguumlccedil-Kunt and V Maksimovic (2005) ldquoFinancial and Legal Constraints to
Growth Does the Firm Size Matterrdquo The Journal of Finance Vol LX No1 February
2005
Beck T A Demirguumlccedil-Kunt L Laeven and V Maksimovic (2006) ldquoThe Determinants of
Financing Obstaclesrdquo The Journal of International Money and Finance 25 pp932-952
Beck T A Demirguumlccedil-Kunt and V Maksimovic 2008 ldquoFinancial Patterns Around the World
Are Small Firms Differentrdquo Journal of Financial Economics 89(3) 467-487
Berger A amp G Udell 1998 The Economics of Small Business Finance The Role of
24
Private Equity and Debt Markets in the Financial Growth Cycle Journal of Banking
and Finance 22 613ndash73
Berglof E and Bolton P 2002 The great divide and beyond financial architecture in
transition Journal of Economic Perspectives 16 (1 Winter) pp 77-100
Bernanke B S amp M Gertler 1995 Inside the Black Box The Credit Channel of Monetary
Policy Transmission NBER Working Papers 5146 National Bureau of Economic Research
Inc
Bernanke B M Gertler amp S Gilchrist 1998 The Financial Accelerator in a Quantitative
Business Cycle Framework in Taylor J amp M Woodford (ed) 1999 Handbook of
Macroeconomics Elsevier 1(1)
Bevan A and J Danbolt 2002 Capital structure and its determinants in the UK - a
decompositional analysis Applied Financial Economics 12(3) 159-170
Bygrave W 2003 Financing Entrepreneurs and their Ventures In P Reynolds W Bygrave
and E Autio eds Global Entrepreneurship Monitor 2003 Global Report Kansas City
Kauffman Center for Entrepreneurial Leadership at the Ewing Mario Kauffman Foundation
Calderon C Didier T 2009 Severity Of The Crisis And Its Transmission Channels World Bank LAC Research Report CantonE I Grilo J Monteagudo and P van der Zwan 2010 Investigating the Perceptions
of Credit Constraints in the European Union Erasmus Research Institute of Management
Report
Chakraborty I 2008 Capital Structure in Emerging Stock Market The Case of India
Research in International Business and Finance doi101016jribaf201002001
Chang C Lee A amp Lee C 2009 Determinants of Capital Structure Choice A Structural
Equation Modeling Approach Quarterly Journal of Economics and Finance 49 197-213
Commander SJ amp J Svejnar 2011 Business Environment Exports Ownership and Firm
Performance Review of Economics and Statistics 931 309-337
Correa PG Fernandes AM amp Uregian C 2010 Technology Adoption and the Investment
Climate Firm-Level Evidence for Eastern Europe and Central Asia The World
Bank Economic Review 24 121-147
Crnigoj M 2007 Risk Averse Insiders with Specific Objective Function and Capital
Structure Mimeo
Cull R and L C Xu 2007 Formal Finance and Trade Credit during Chinarsquos Transition
World Bank Policy Research Working Paper 4204
De La Torre AM Peria and S Schmukler 2008 Bank Involvement with SMEs Beyond
Relationship Lending Working Paper Series 4649 World Bank Washington DC
Delcoure N 2007 The Determinants of Capital Structure in Transitional Economies
25
International Review of Economics and Finance 16 400-415
Didier T Hevia C and Schmukler SL 2011 How Resilient Were Emerging Economies to the Global Crisis World Bank Policy Research Working Paper No 5637
Estrin S and T Mickiewicz 2010 Entrepreneurship in Transition Economies The Role of
Institutions Forthcoming in edited volume by M Minitti at Oxford UP
Estrin S J Korostelva and T Mickiewicz 2011 Which Institutions Encourage Entrepreneurs
to Create Larger Firms IZA Discussion Paper 5481 available from
httpftpizaorgdp5481pdf
Ge Y and J Qiu 2007 Financial Development Bank Discrimination and Trade Credit
Journal of Banking amp Finance 31 513ndash530
Gertler M and S Gilchrist 1993 The Role of Credit Market Imperfections in the Monetary
Transmission Mechanism Arguments and Evidence The Scandinavian Journal of
Economics 95(1) (Mar 1993) 43-64
Girma S Gong Y amp Gorg H 2008 Foreign Direct Investment Access to Finance and
Innovation Activity in Chinese Enterprises The World Bank Economic Review 22 367-382
Glaeser E R La Porta F Lopez-de-Silanes and A Shleifer Do Institutions Cause
Growth NBER Working Paper Series 10568 2004
Gorodnichenko Y and M Schnitzer 2010 Financial constraints and innovation Why poor
countries donrsquot catch up NBER working papers 15792 National Bureau of Economic
Research Inc
Fraser S 2009 Small Firms in the Credit Crisis Evidence from the UK Survey of SME Finances Economic and Social Research Council Report Available at httpwww2warwickacukfacsocwbsresearchcsmeresearchlatestsmall_firms_in_the_credit_crisis_v3-oct09pdf Herbane B 2011 Small business research Time for a crisis-based view International Small
Business Journal 28(1)43ndash64
Huyghebaert N 2001 The Capital Structure of the Business Start-ups Determinants of
Initial Capital Structure Review of Banking and Finance 284-88
Isachenkova N J Korosteleva and Y Rodionova 2011 Financing Choices A Study of
Entrepreneurial Firms in High-tech Industries CSESCE Working Paper No Centre for
the Study of Economic and Social Change in Europe UCL London
Johnson S J McMillan and C Woodruff 2002 Property Rights and Finance The American
Economic Review 92 (5)1335-1356
Klapper L V Sarria-Allende and V Sulla 2002 Small- and Medium-Size Enterprise
Financing in Eastern Europe World Bank Policy Research Working Paper 2933
26
Klapper L F and Randall D 2010 ldquoThe Impact of the Financial Crisis on Supply-Chain
Financingrdquo World Bank Group Enterprise note No 13Korosteleva J and Mickiewicz T
2011 Startup finance in the age of globalisation Emerging Markets Finance and Trade
47(3) 23-49
Korosteleva J and C Lawson (2010) The Belarusian Case of Transition Whither Financial
Repression Post-Communist Economies Vol 22(1)
Levine R 1997 Financial Development and Economic Growth Views and Agenda Journal
of Economic Literature 35 (June) 688-726
Li K Yue H amp Zhao L 2009 Ownership Institutions and Capital Structure Evidence
From China Journal of Comparative Economics 37 471-490
Lizal L and J Svejnar 2002 Investment credit rationing and the soft budget constraint
evidence from Czech panel data Review of Economics and Statistics 84(2) 353-370
Love I 2003 Financial development and financing constraints International evidence from
the structural investment model Review of Financial Studies 16(3) pp 765-79
Love I and R Zaidi 2010 Trade Credit Bank Credit and Financial Crisis International
Review of Finance 10(1) 125-147 March
Mateut S S Bougheas and P Mizen 2006 Trade credit bank lending and monetary
policy transmission European Economic Review 50(3) 603-629
Matthews C H and S G Scott1995 Uncertainty and Planning in Small and
Entrepreneurial Firms An Empirical Assessment Journal of Small Business management
23(4) 34-52
Meltzer A H 1960 Mercantile Credit Monetary Policy and Size of Firms The Review of
Economics and Statistics 42 (4 ) (Nov 1960) 429-437
Mitra P amp Muravyev A amp M Schaffer 2008 Convergence in Institutions and Market
Outcomes Cross-Country and Time-Series Evidence from the BEEPS Surveys in Transition
Economies IZA Discussion Papers 3863 Institute for the Study of Labor (IZA)
Modigliani F and MH Miller 1958 The Cost of Capital Corporation Finance and the
Theory of Investment American Economic Review 48(3) pp 261-97
Nielsen J H 2002 Trade Credit and the Bank Lending Channel Journal of Money Credit
and Banking 34 226-253
Nivorozhkin E 2005 Financing Choices of Firms in EU Accession Countries Emerging
Markets Review 6 138-169
Norton E Wang H and C Ai 2004 Computing Interaction Effects in Logit and Probit
Models The Stata Journal 4(2) 103-116
Petersen M A and R G Rajan 1997 Trade Credit Theory and Evidence Review of
Financial Studies 10 661ndash691
27
Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
No 33
Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
Small- and Medium-sized Businesses in Central and Eastern Europe Journal of Business
Venturing 14 519-539
Pissarides F 2001 Financial Structure to Promote Private Sector Development in South-
Eastern Europe EBRD Working Paper No 64
Pissarides F M Singer and J Svejnar 2003 Objectives and Constraints of Entrepreneurs
Evidence from Small and Medium Size Enterprises in Russia and Bulgaria Journal of
Comparative Economics 31 503-531
Radygin A D A E Gontmakher M G Kuzyk I V Mezheraup H Swain Yu V
Simachiov N A Shmeleva and R M Entov 2005 The institution of Bankruptcy
Development Problems Areas of Reforming Consortium for Economic Policy Research and
Advice Moscow 2005
Ravid S and M Spiegel 1997 Optimal Financing Contracts for a Start-up with Unlimited
Operating Discretion Journal of Financial and Quantitative Analysis 32 269-86
Rostowski J ed 1995 Banking reform in Central Europe and the Soviet Union Budapest
Central University Press
Rehman Shafiq 2011 The Effect of Financial Crisis on the Behaviour of Trade Credit A
Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
Roodman D 2009 Estimating Fully Observed Recursive Mixed-Process Models with cmp CGD Working Paper 168 Washington DC Center for Global Development Sprenger C 2002 ldquoOwnership and Corporate Governance in Russian Industry a Surveyrdquo
EBRD Working Paper No70
Stijn Claessens and Konstantinos Tzioumis 2006 Measuring firmsrsquo access to finance
World Bank Working Paper
Taketa G and K Udell 2007 Lending Channels and Financial Shocks The Case of Small
and Medium-Sized Enterprise Trade Credit and the Japanese Banking Crisis Monetary and
Economic Studies Institute for Monetary and Economic Studies Bank of Japan 25(2) 1- 44
November
Tornell A and F Westermann 2005 Boom-Bust Cycles and Financial Liberalization
Cambridge MA MIT Press
Verbeek M (2000) A Guide to Modern Econometrics John Wiley amp Sons New York
28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
Challenging Environments Journal of Small Business Management 49(1) 107-125
World Bank (2011) World Development Indicators (edition September 2011) ESDS
International University of Manchester DOI httpdxdoiorg105257wbwdi2011-09
Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
12
we concentrate on two institutional factors the degree of protection of property rights and the
size of the formal financial sector which have been claimed to be of key importance for firmsrsquo
financing decisions (see Korosteleva and Mickiewicz (2011) for overview of the related
literature) As far as the property rights protection is concerned it is found to play crucial role
for firm growth and access to external finance (Aidis et al 2008 2010 Korosteleva and
Mickiewicz 2011 Estrin Korosteleva and Mickiewicz 2011) In the environment with weak
protection of property rights financial contracts are less likely to be concluded leading to the
underdevelopment of finance and credit rationing with small firms to be disproportionally
affected the most (Acemoglu and Johnson 2005) Beck et al (2004) show that in terms of
access to external finance small firms benefit disproportionally from higher levels of property
rights protection Lack of secure property rights may also discourage SMEs from taking full
advantage of opportunities to invest (Johnson et al 2002) In a survey of private small
manufacturing firms in Poland Russia Ukraine Romania and Slovakia Johnson et al
(2002) find that small firms tend to reinvest less of their earnings when they perceive their
property rights insecure They also find that the effect of the property rights system is of more
paramount importance for entrepreneursrsquo decisions to reinvest their earnings than availability
of formal finance Moreover if property rights are well-protected this lessens the extent of
potential threat of being expropriated by raidersbank lenders in an artificial bankruptcy
procedure which has been quite a significant issue for firms in Russia and other FSU states
(Radygin et al 2005 Sprenger 2002) Based on this we expect that strong property rights
are likely to encourage SMEs to use more debt as well as to use their own funds and
retained profits for investing in investment projects
With regards to the size of the formal finance as measured by the share of private
credit to GDP the relationship between financial depth and financial constraints has been
extensively studied (Beck et al 2006 also see for example Love 2003 who employing a
sample of 36 countries finds that financial development affects firmsrsquo investment by
increasing the availability of external finance) Financial intermediaries facilitate the risk
amelioration in the presence of problems created by information and transaction frictions by
developing expertise in risk assessment and in monitoring (Levine 1997 Barth et al 2006
Barth et al 2008) Developed financial institutions are found to be particularly beneficial for
small firms compared to large ones (Barth et al 2006 Beck et al 2005 2006 2008)
Pissarides et al (2003) show that financial constraints affect SMEs even more than
deficiency of the property rights protection Accordingly the size of the formal financial
system is expected to be positively related to the use of bank finance as a better functioning
financial system should help ease up borrowing constraints
4 Data and Methodology
13
41 Sample
To explore the determinants of the financial structure of small businesses we use the
2002-2009 Business Environment and Enterprise Performance Survey (BEEPS) data6 of
21867 firms covering 26 transition economies of Europe and Central Asia (ECA)7
The sample is primarily comprised of small and medium-sized businesses8 which
account for 893 per cent of the sample The sample is representative in terms of industrial
coverage with the majority of SMEs of the sample operating in manufacturing wholesale
and retailing industries
BEEPS dataset provides rich information on firm characteristics investment
behaviour and firmsrsquo perception of business environment including financial constraints
which are of a primary interest for our investigation of the effect of the recent financial crisis
on firmsrsquo perception of financial constraints Potentially we could use other micro-level data
characterising various domains of business environment captured by firmsrsquo perceptions for
investigating the effects of the institutional settings However using these micro-level
indicators as explanatory variables would make our study plagued with a problem of
endogeneity To avoid this we merge our firm-level data with country-level indicators
characterising various institutional domains The country level data were obtained from the
World Development Indicators (World Bank) and Polity IV databases (for further discussion
see below) Finally the BEEPs dataset contains other useful information which allows us to
shed light of the effect of for example social capital as proxied by the indirect measure of
possible connections with the authorities (see below for the definition of the variable) on firm
financing
42 Variable Definition and Measurement
Explanatory variables
6 This data is a joint project of the European Bank for Reconstruction and Development and World Bank The first survey was launched in 1999 The dataset used in the present study is an unbalanced panel covering the years of 2002 2005 2007-2009 7 The sample includes the following countries Albania Armenia Azerbaijan Belarus Bosnia Bulgaria Croatia Czech Republic Estonia FYROM Georgia Hungary Kazakhstan Kyrgyzstan Latvia Lithuania Moldova Montenegro Poland Romania Russia Serbia Slovakia Slovenia Tajikistan and Ukraine We exclude Uzbekistan as an outlier from our sample We also exclude Turkey as it is not classified as a post-communist country undertaking transition from a planned to a market economy 8 We utilize the EU employment criterion to define small and medium-sized businesses More specifically businesses are defined as micro if they employ 9 and less employees small ndash between 10 and 49 medium ndash between 50 and 249 and large ndash over 250 employees Respectively SMEs are defined as firms employing less than 249 firms
14
To test our main hypothesis of the effect of a firm size on firmsrsquo perception of financial
constraints we introduce a dummy variable denoting small and medium-sized business
coded as 1 if firms are classified as small or medium-sized businesses according to the EU
definition based on the employment criterion For robustness of our results we also use a
continuous variable denoting a size of employment as measured by the natural logarithm of
employment9 The obtained results are consistent with the ones using the SME indicators
To capture the effect of the recent financial crisis we introduce a crisis dummy coded
as 1 if the year of survey is equal to 2008 or 200910
We also introduce a number of firm-level controls which include age of firm11 type of
ownership including private and foreign ownership export orientation and whether a firm
has an internationally certified product all equal to 1 if a business has a respectively listed
characteristic and zero otherwise We also examine the effect of various sources of pressure
on firms to innovate ndash the indicators which are considered to be important for firm investment
decisions Respectively the pressure for innovation may stem from domestic competition
foreign competition and customers To capture the effect of a firmrsquos social capital we
introduce an indicator which indirectly may capture some possible connections of a firm with
authorities It is proxied by time spent by each firm on dealing with government regulations
We assume the less time firms spend dealing with government regulations the more likely
they have some established connections with public officials which allow them to avoid
burdensome regulation procedures
In our study we also introduce a number of country-level variables which characterize
the institutional environment in the countries covered by our sample More specifically we
include an indicator of the financial development as measured by the ratio of domestic credit
to private sector to GDP (one year lag to avoid potential endogeneity) obtained from the
World Bank World Development Indicators (World Bank 2011) This measure has been used
in previous studies (Klapper et al 2006) and it is expected to be of a primary importance for
transition economies where firms tend to rely more on bank finance rather than capital
markets We also introduce a measure of property rights protection (a one year lag) proxied
by the indicator of effective constraints imposed on the executive branch of the government
and obtained from Polity IV project12 This measure of property rights protection is
9 These results are not reported here to save some space However they can be obtained from authors upon request 10 Here it is important to note that although the financial crisis has started in 2007 in the USA it spread to transition economies in 2008-2009 11 Some studies find a non-monotonic relationship between age and firm decision-making In this study we introduce a squared term of age along with a age variable to capture this possible non-linearity 12 Available from httpwwwsystemicpeaceorgpolitypolity4htm
15
considered to be superior to other indicators including the index of property rights reported
by the Heritage Foundation ndashWall Street Journal (for further discussion see Acemoglu and
Johnson 2005 Glaeser et al 2004 Estrin Korosteleva and Mickieiwcz 2011)
In the present study we also introduce macroeconomic controls including cyclical
economic performance as measured by the one year lag of the GDP annual growth rate
and the level of economic development as proxied by a set of GDP pc dummies denoting
the five quintiles of its distribution to address the problem of potential multicollinearity with the
measure of financial development
Finally we include industry and country controls in all our specifications Introducing
country dummies into analysis allows to control for cross-country heterogeneity
For further definition of all variables their descriptive statistics and correlation matrix
see Tables 1-2
43 Dependent variables
To investigate the effect of a firmrsquos size on its perception of financial constraints we
construct a dummy variable coded as 1 capturing a major and very severe obstacle for
access to finance and 0 otherwise
The firm financing choices are defined by the five individual dependent variables
associated with tobit financial choice equations in the seemingly unrelated regression
equations model
One important thing to mention here is the inability to distinguish between
owninternal funds and external private equity considered as one of the limitations of the
2002-2009 BEEPS dataset In the period under investigation BEEPS offers two questions
which aim to capture the use of equity The first one centres around retained earnings and
the second one shows ownersrsquo contributions and private equity or issued new equity
Following some theoretical considerations discussed in sections 2 and 3 in the context of
SMEs we expect the second element of equity to be primarily comprised of existing ownersrsquo
new contributions rather than private equity
Thus the indicator of financial choices represents a set of five individual dependent
variables including retained earnings contributed earnings private borrowing informal
finance trade credit with each of them constructed as a share in total financing of SMErsquos
investment decisions (see Table 1)
44 Methods
16
In this study we employ a number of estimators to obtain robust results More
specifically we use a probit model to investigate the effect of a firm size and the recent
financial crisis on firmsrsquo perception of financial constraints The effect of a firm size in the
situation of crisis is captured by the introduction of the interaction term between firm size as
proxied by the SME indicator and a financial crisis dummy
We further employ the seemingly unrelated regression equations model combined
with the tobit approach for studying firmsrsquo financial structure
Probit model of perception of financial constraints
In the probit model the probability of a firmrsquos perception of financial constraints as
major(j = 1) can be written as follows
( ) ( )int ++
++
infinminus
minus===
ijitj uXjitiitit ijitjuXjy uX
βα βαππ 212-
)()(2 21exp|Pr
Where ity is our measure of financial constraints as perceived by firms and itX is a
set of our explanatory variables discussed in detail in sections 3-4 Here it is important to
note that the interaction term in a probit model cannot be interpreted in a similar way as in
linear models and disregarding this may lead to misleading estimates of the interaction
effect which is of crucial importance for our study (Norton Wang and Ai 2004) Respectively
for robustness of our results here we follow the framework suggested by Norton Wang and
Ai (2004) to account for the model nonlinearity The adjusted marginal effects for the
interaction term are reported in the note to Table 313
Simultaneous Model of Financing Choices
As mentioned above we next model the choice of all five financing choices explicitly
We also hypothesise (following Isachenkova et al 2011) that firm financing choices are likely
to be determined jointly A standard way of modelling jointly determined indicators is a
system of equations - SURE ndash seemingly unrelated regression equations where equations
are linked only by their errors (Zellner 1962) We therefore model the five types of sources of
finance (internal funds private bank borrowing informal finance trade credit and private
13 We also run a probit regression for a split sample of (1) SMEs and (2) large firms to check the robustness of our results (based on the interaction term) while addressing a problem of multicollinearity between a crisis variable and its interaction term with a SME variable The correlation coefficient between a crisis variable and its interaction term with a SME variable is equal to 93 This can be attributed by the problem of a sample being overrepresented by SMEs which constitute 90 of all surveyed firms The results remain robust and can be available from authors upon request
17
equity) using a SURE framework within which we specify a set of five tobit regressions with
correlated residuals
We employ the STATA cmp module which allows to it Seemingly Unrelated Regressions
using the simulated likelihood method such as the Geweke Hajivassiliou and Keane (GHK)
algorithm (for further discussion see Roodman 2008) We utilise a tobit equation to model
each individual financial choice of firms because our dependent financing choices variables
are continuous but their range is constrained (censored) with a substantial number of
observations either equal to zero denoting those who do not use the respective source of
finance or to 100 showing the opposite Other observations are positive and may produce
many different outcomes (Verbeek 2000) Each tobit equation uses a set of identical
explanatory variables that proxy factors which could possibly be associated with firmrsquos
financing choices including industry and country dummies
We also considered the bias caused by potential interdependence between the choice of
whether to invest and firmrsquos financing choices We accounted for the potential selection bias
by introducing into the financial choices SURE Tobit equations (second stage outcome
equations14) the inverse Millrsquos ratio calculated based on modelling the choice to invest in
fixed assets (first stage or selection equation) To identify the first stage of the Heckman
selection model we chose a variable which is correlated with the first stage dependent
variable (investment decision) but not with the second ones (financing choices) We used the
rate of capacity utilization as part of our identification strategy Capacity utilization shows the
percentage of capital stock in use the higher is the rate the more likely firms will increase
investment Batyaeva and Aukutsionek (2001) show that the rate of capacity utilization is
higher in the group of investing firms than in the group of non-investing firms in Russia15 We
calculated the inverse Millrsquos ratio based on the above selection equation16 and included it as
a control in the second stage SURE Tobit equations The inverse Millrsquos ratio has only proved
to be statistically significant in the private bank loan equation pointing to the potential
selection bias arising from the possibility that the factors determining the decision to invest
might differ from those determining the use of bank financing in purchasing fixed assets
14 We also attempted to estimate an investment equation jointly with Tobit financial choices equations within the SURE framework using However given the overall complexity of the model we failed to do this We proceeded further with a two-stage approach by estimating an investment probit equation and calculating the inverse Millrsquos ratio that we add into the outcome financial choices equations at the second stage of the analysis to test for the selection bias 15 We performed an independent sample t-test to check whether the rate of capacity utilization is statistically significantly higher for investing firms compared to non-investing firms for our sample The null hypothesis of no difference was rejected at 1 level of significance 16 To economize on space we do not report the results of the investment probit equation but they are available from authorsrsquo upon request
18
Finally In Table 6 we attempt to condition the determinants of financing constraints
declared by SMEs on the relative percentage increase of trade credit in total funds used for
real investment As mentioned above in Section 2 the timings of measuring the composition
of financing sources precede by a year the timings of measuring the perceptions of financing
constraints That feature of the BEEPSrsquo design allays a likely concern about the endogeneity
of the relative proportion of trade credit and enables causal inference We too report in thre
note to Table 4 the adjusted marginal effects for the interaction term of the SME dummy with
the trade credit variable
In the next section we discuss our empirical results
5 Empirical Results
Table 3 reports the results of the probit model with the marginal effects for firmsrsquo
perception of financial constraints while Tables 4-5 summarize the results of SURE tobits for
a more detailed breakdown of five financing choices More specifically Table 4 reports the
results based on the whole sample to give a comparative perspective on SMErsquos financing
strategy vis-a-vis large businesses whereas Table 5 reports the results based on a
subsample of small and medium-sized firms to shed some light on their financing choices in
the period of crisis
Perception of financial constraints
Table 3 shows that generally small and medium-sized enterprises feel more financially
constrained with the coefficient for SME dummy in relation to the large firms being positive
and significant which is consistent with our discussion in sections 2-3 However the
coefficient of the interaction term with the Crisis dummy turns out to be negative and
significant in relation to the perception of financial constraints as a major obstacle and it
tends to outweigh the effect of a SME dummy when we calculate marginal effects The effect
of the interaction terms with the crisis remains robust after we adjust for non-linearity using
the framework proposed by Norton Wang and Ai (2004)17 Overall these results confirm
that small and medium-sized enterprises are much less financially constrained during the
crisis years with their perceptions close to those of the large firms This result is a polar
opposite to that obtained for the SMEs in the UK (Fraser 2009) which finds that not only do
SMEs generally feel more financially constrained but they report to be even more so during
17 We also check the robustness of our results to the potential problem of multicollinearity between a crisis dummy and its interaction term with SME by splitting a sample and testing the same specification separately for SMEs and large firms We also perform another robustness check by breaking a SME dummy into three subsequent dummies namely micro- small- and medium-sized firms The difference in perception of financial constraints gets almost eliminated in the case of small firms and is largely reduced in the case of micro firms whereas it is less so for medium-sized firms
19
the last crisis We could explain this striking difference by the peculiarities of the SMEs
functioning in new emerging economies The lower reliance of SMEs on external debt in
good times (as shown by results which are discussed below) gives SMEs some flexibility
during the crisis when formal financial markets dry up Jointly with overall flexibility to make
necessary cost cuts and to restructure a business this overall lower reliance on external
funding and the use of alternative sources of financing makes SMEs feel less financially
constrained under the crisis as compared to larger firms
We also find that a more developed financial sector as proxied by domestic private
credit as proportion of GDP helps ease up financial constraints This is in line with the
general literature suggesting that better functioning financial intermediaries facilitate the risk
amelioration in the presence of problems created by market frictions (Levine 1997 Barth et
al 2006 Barth et al 2008)
Unfortunately we fail to find any significant effect of the property rights protection on
firmsrsquo perception of financial constraints that may be explained by the fact that the effect of a
more developed financial sector is likely to outweigh the effect of the property rights
protection
Finally we also find that foreign ownership and international product certificate may
reduce firmsrsquo borrowing constraints while any pressure from domestic or foreign competition
so is pressure from the customers to innovate will increase firmrsquos perception of financial
constraints as major given that firms envisage the need to secure external funding for RampD
or any other innovation-related activities
Financing choices for investment in fixed assets
The results in Table 4 indicate that small enterprises tend to rely more on internal funds
and less on bank loans but they are no different from larger firms in respect of using informal
funds trade credit or private equity which is generally consistent with our discussion in
Sections 2 and 3 The results of Table 5 suggest however that under crisis small and
medium-sized firms tend to switch to other sources of finance such as trade credit and
ownerrsquos contributed equity and to respectively reduce the reliance on retained earnings
perhaps because they decrease due to the negative impact of crisis internal funds With
regards to our discussion of SMEsrsquo risk management we note that the use of private equity
(ownerrsquos contribution) during the crisis years increases which could indicate that the ownerrsquos
funds are used as a cushion in the period of financial distress
An interesting insight regarding the use of trade credit emerges for SMEs in our
sample although in non-crisis years small and medium-sized businesses are not significantly
different from larger firms in terms of reliance on trade credit SMEs tend to finance a
significantly higher proportion of their fixed asset investment by trade credit than large firms
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Business Journal 28(1)43ndash64
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Financing in Eastern Europe World Bank Policy Research Working Paper 2933
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2011 Startup finance in the age of globalisation Emerging Markets Finance and Trade
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Levine R 1997 Financial Development and Economic Growth Views and Agenda Journal
of Economic Literature 35 (June) 688-726
Li K Yue H amp Zhao L 2009 Ownership Institutions and Capital Structure Evidence
From China Journal of Comparative Economics 37 471-490
Lizal L and J Svejnar 2002 Investment credit rationing and the soft budget constraint
evidence from Czech panel data Review of Economics and Statistics 84(2) 353-370
Love I 2003 Financial development and financing constraints International evidence from
the structural investment model Review of Financial Studies 16(3) pp 765-79
Love I and R Zaidi 2010 Trade Credit Bank Credit and Financial Crisis International
Review of Finance 10(1) 125-147 March
Mateut S S Bougheas and P Mizen 2006 Trade credit bank lending and monetary
policy transmission European Economic Review 50(3) 603-629
Matthews C H and S G Scott1995 Uncertainty and Planning in Small and
Entrepreneurial Firms An Empirical Assessment Journal of Small Business management
23(4) 34-52
Meltzer A H 1960 Mercantile Credit Monetary Policy and Size of Firms The Review of
Economics and Statistics 42 (4 ) (Nov 1960) 429-437
Mitra P amp Muravyev A amp M Schaffer 2008 Convergence in Institutions and Market
Outcomes Cross-Country and Time-Series Evidence from the BEEPS Surveys in Transition
Economies IZA Discussion Papers 3863 Institute for the Study of Labor (IZA)
Modigliani F and MH Miller 1958 The Cost of Capital Corporation Finance and the
Theory of Investment American Economic Review 48(3) pp 261-97
Nielsen J H 2002 Trade Credit and the Bank Lending Channel Journal of Money Credit
and Banking 34 226-253
Nivorozhkin E 2005 Financing Choices of Firms in EU Accession Countries Emerging
Markets Review 6 138-169
Norton E Wang H and C Ai 2004 Computing Interaction Effects in Logit and Probit
Models The Stata Journal 4(2) 103-116
Petersen M A and R G Rajan 1997 Trade Credit Theory and Evidence Review of
Financial Studies 10 661ndash691
27
Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
No 33
Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
Small- and Medium-sized Businesses in Central and Eastern Europe Journal of Business
Venturing 14 519-539
Pissarides F 2001 Financial Structure to Promote Private Sector Development in South-
Eastern Europe EBRD Working Paper No 64
Pissarides F M Singer and J Svejnar 2003 Objectives and Constraints of Entrepreneurs
Evidence from Small and Medium Size Enterprises in Russia and Bulgaria Journal of
Comparative Economics 31 503-531
Radygin A D A E Gontmakher M G Kuzyk I V Mezheraup H Swain Yu V
Simachiov N A Shmeleva and R M Entov 2005 The institution of Bankruptcy
Development Problems Areas of Reforming Consortium for Economic Policy Research and
Advice Moscow 2005
Ravid S and M Spiegel 1997 Optimal Financing Contracts for a Start-up with Unlimited
Operating Discretion Journal of Financial and Quantitative Analysis 32 269-86
Rostowski J ed 1995 Banking reform in Central Europe and the Soviet Union Budapest
Central University Press
Rehman Shafiq 2011 The Effect of Financial Crisis on the Behaviour of Trade Credit A
Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
Roodman D 2009 Estimating Fully Observed Recursive Mixed-Process Models with cmp CGD Working Paper 168 Washington DC Center for Global Development Sprenger C 2002 ldquoOwnership and Corporate Governance in Russian Industry a Surveyrdquo
EBRD Working Paper No70
Stijn Claessens and Konstantinos Tzioumis 2006 Measuring firmsrsquo access to finance
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Taketa G and K Udell 2007 Lending Channels and Financial Shocks The Case of Small
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November
Tornell A and F Westermann 2005 Boom-Bust Cycles and Financial Liberalization
Cambridge MA MIT Press
Verbeek M (2000) A Guide to Modern Econometrics John Wiley amp Sons New York
28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
Challenging Environments Journal of Small Business Management 49(1) 107-125
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International University of Manchester DOI httpdxdoiorg105257wbwdi2011-09
Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
13
41 Sample
To explore the determinants of the financial structure of small businesses we use the
2002-2009 Business Environment and Enterprise Performance Survey (BEEPS) data6 of
21867 firms covering 26 transition economies of Europe and Central Asia (ECA)7
The sample is primarily comprised of small and medium-sized businesses8 which
account for 893 per cent of the sample The sample is representative in terms of industrial
coverage with the majority of SMEs of the sample operating in manufacturing wholesale
and retailing industries
BEEPS dataset provides rich information on firm characteristics investment
behaviour and firmsrsquo perception of business environment including financial constraints
which are of a primary interest for our investigation of the effect of the recent financial crisis
on firmsrsquo perception of financial constraints Potentially we could use other micro-level data
characterising various domains of business environment captured by firmsrsquo perceptions for
investigating the effects of the institutional settings However using these micro-level
indicators as explanatory variables would make our study plagued with a problem of
endogeneity To avoid this we merge our firm-level data with country-level indicators
characterising various institutional domains The country level data were obtained from the
World Development Indicators (World Bank) and Polity IV databases (for further discussion
see below) Finally the BEEPs dataset contains other useful information which allows us to
shed light of the effect of for example social capital as proxied by the indirect measure of
possible connections with the authorities (see below for the definition of the variable) on firm
financing
42 Variable Definition and Measurement
Explanatory variables
6 This data is a joint project of the European Bank for Reconstruction and Development and World Bank The first survey was launched in 1999 The dataset used in the present study is an unbalanced panel covering the years of 2002 2005 2007-2009 7 The sample includes the following countries Albania Armenia Azerbaijan Belarus Bosnia Bulgaria Croatia Czech Republic Estonia FYROM Georgia Hungary Kazakhstan Kyrgyzstan Latvia Lithuania Moldova Montenegro Poland Romania Russia Serbia Slovakia Slovenia Tajikistan and Ukraine We exclude Uzbekistan as an outlier from our sample We also exclude Turkey as it is not classified as a post-communist country undertaking transition from a planned to a market economy 8 We utilize the EU employment criterion to define small and medium-sized businesses More specifically businesses are defined as micro if they employ 9 and less employees small ndash between 10 and 49 medium ndash between 50 and 249 and large ndash over 250 employees Respectively SMEs are defined as firms employing less than 249 firms
14
To test our main hypothesis of the effect of a firm size on firmsrsquo perception of financial
constraints we introduce a dummy variable denoting small and medium-sized business
coded as 1 if firms are classified as small or medium-sized businesses according to the EU
definition based on the employment criterion For robustness of our results we also use a
continuous variable denoting a size of employment as measured by the natural logarithm of
employment9 The obtained results are consistent with the ones using the SME indicators
To capture the effect of the recent financial crisis we introduce a crisis dummy coded
as 1 if the year of survey is equal to 2008 or 200910
We also introduce a number of firm-level controls which include age of firm11 type of
ownership including private and foreign ownership export orientation and whether a firm
has an internationally certified product all equal to 1 if a business has a respectively listed
characteristic and zero otherwise We also examine the effect of various sources of pressure
on firms to innovate ndash the indicators which are considered to be important for firm investment
decisions Respectively the pressure for innovation may stem from domestic competition
foreign competition and customers To capture the effect of a firmrsquos social capital we
introduce an indicator which indirectly may capture some possible connections of a firm with
authorities It is proxied by time spent by each firm on dealing with government regulations
We assume the less time firms spend dealing with government regulations the more likely
they have some established connections with public officials which allow them to avoid
burdensome regulation procedures
In our study we also introduce a number of country-level variables which characterize
the institutional environment in the countries covered by our sample More specifically we
include an indicator of the financial development as measured by the ratio of domestic credit
to private sector to GDP (one year lag to avoid potential endogeneity) obtained from the
World Bank World Development Indicators (World Bank 2011) This measure has been used
in previous studies (Klapper et al 2006) and it is expected to be of a primary importance for
transition economies where firms tend to rely more on bank finance rather than capital
markets We also introduce a measure of property rights protection (a one year lag) proxied
by the indicator of effective constraints imposed on the executive branch of the government
and obtained from Polity IV project12 This measure of property rights protection is
9 These results are not reported here to save some space However they can be obtained from authors upon request 10 Here it is important to note that although the financial crisis has started in 2007 in the USA it spread to transition economies in 2008-2009 11 Some studies find a non-monotonic relationship between age and firm decision-making In this study we introduce a squared term of age along with a age variable to capture this possible non-linearity 12 Available from httpwwwsystemicpeaceorgpolitypolity4htm
15
considered to be superior to other indicators including the index of property rights reported
by the Heritage Foundation ndashWall Street Journal (for further discussion see Acemoglu and
Johnson 2005 Glaeser et al 2004 Estrin Korosteleva and Mickieiwcz 2011)
In the present study we also introduce macroeconomic controls including cyclical
economic performance as measured by the one year lag of the GDP annual growth rate
and the level of economic development as proxied by a set of GDP pc dummies denoting
the five quintiles of its distribution to address the problem of potential multicollinearity with the
measure of financial development
Finally we include industry and country controls in all our specifications Introducing
country dummies into analysis allows to control for cross-country heterogeneity
For further definition of all variables their descriptive statistics and correlation matrix
see Tables 1-2
43 Dependent variables
To investigate the effect of a firmrsquos size on its perception of financial constraints we
construct a dummy variable coded as 1 capturing a major and very severe obstacle for
access to finance and 0 otherwise
The firm financing choices are defined by the five individual dependent variables
associated with tobit financial choice equations in the seemingly unrelated regression
equations model
One important thing to mention here is the inability to distinguish between
owninternal funds and external private equity considered as one of the limitations of the
2002-2009 BEEPS dataset In the period under investigation BEEPS offers two questions
which aim to capture the use of equity The first one centres around retained earnings and
the second one shows ownersrsquo contributions and private equity or issued new equity
Following some theoretical considerations discussed in sections 2 and 3 in the context of
SMEs we expect the second element of equity to be primarily comprised of existing ownersrsquo
new contributions rather than private equity
Thus the indicator of financial choices represents a set of five individual dependent
variables including retained earnings contributed earnings private borrowing informal
finance trade credit with each of them constructed as a share in total financing of SMErsquos
investment decisions (see Table 1)
44 Methods
16
In this study we employ a number of estimators to obtain robust results More
specifically we use a probit model to investigate the effect of a firm size and the recent
financial crisis on firmsrsquo perception of financial constraints The effect of a firm size in the
situation of crisis is captured by the introduction of the interaction term between firm size as
proxied by the SME indicator and a financial crisis dummy
We further employ the seemingly unrelated regression equations model combined
with the tobit approach for studying firmsrsquo financial structure
Probit model of perception of financial constraints
In the probit model the probability of a firmrsquos perception of financial constraints as
major(j = 1) can be written as follows
( ) ( )int ++
++
infinminus
minus===
ijitj uXjitiitit ijitjuXjy uX
βα βαππ 212-
)()(2 21exp|Pr
Where ity is our measure of financial constraints as perceived by firms and itX is a
set of our explanatory variables discussed in detail in sections 3-4 Here it is important to
note that the interaction term in a probit model cannot be interpreted in a similar way as in
linear models and disregarding this may lead to misleading estimates of the interaction
effect which is of crucial importance for our study (Norton Wang and Ai 2004) Respectively
for robustness of our results here we follow the framework suggested by Norton Wang and
Ai (2004) to account for the model nonlinearity The adjusted marginal effects for the
interaction term are reported in the note to Table 313
Simultaneous Model of Financing Choices
As mentioned above we next model the choice of all five financing choices explicitly
We also hypothesise (following Isachenkova et al 2011) that firm financing choices are likely
to be determined jointly A standard way of modelling jointly determined indicators is a
system of equations - SURE ndash seemingly unrelated regression equations where equations
are linked only by their errors (Zellner 1962) We therefore model the five types of sources of
finance (internal funds private bank borrowing informal finance trade credit and private
13 We also run a probit regression for a split sample of (1) SMEs and (2) large firms to check the robustness of our results (based on the interaction term) while addressing a problem of multicollinearity between a crisis variable and its interaction term with a SME variable The correlation coefficient between a crisis variable and its interaction term with a SME variable is equal to 93 This can be attributed by the problem of a sample being overrepresented by SMEs which constitute 90 of all surveyed firms The results remain robust and can be available from authors upon request
17
equity) using a SURE framework within which we specify a set of five tobit regressions with
correlated residuals
We employ the STATA cmp module which allows to it Seemingly Unrelated Regressions
using the simulated likelihood method such as the Geweke Hajivassiliou and Keane (GHK)
algorithm (for further discussion see Roodman 2008) We utilise a tobit equation to model
each individual financial choice of firms because our dependent financing choices variables
are continuous but their range is constrained (censored) with a substantial number of
observations either equal to zero denoting those who do not use the respective source of
finance or to 100 showing the opposite Other observations are positive and may produce
many different outcomes (Verbeek 2000) Each tobit equation uses a set of identical
explanatory variables that proxy factors which could possibly be associated with firmrsquos
financing choices including industry and country dummies
We also considered the bias caused by potential interdependence between the choice of
whether to invest and firmrsquos financing choices We accounted for the potential selection bias
by introducing into the financial choices SURE Tobit equations (second stage outcome
equations14) the inverse Millrsquos ratio calculated based on modelling the choice to invest in
fixed assets (first stage or selection equation) To identify the first stage of the Heckman
selection model we chose a variable which is correlated with the first stage dependent
variable (investment decision) but not with the second ones (financing choices) We used the
rate of capacity utilization as part of our identification strategy Capacity utilization shows the
percentage of capital stock in use the higher is the rate the more likely firms will increase
investment Batyaeva and Aukutsionek (2001) show that the rate of capacity utilization is
higher in the group of investing firms than in the group of non-investing firms in Russia15 We
calculated the inverse Millrsquos ratio based on the above selection equation16 and included it as
a control in the second stage SURE Tobit equations The inverse Millrsquos ratio has only proved
to be statistically significant in the private bank loan equation pointing to the potential
selection bias arising from the possibility that the factors determining the decision to invest
might differ from those determining the use of bank financing in purchasing fixed assets
14 We also attempted to estimate an investment equation jointly with Tobit financial choices equations within the SURE framework using However given the overall complexity of the model we failed to do this We proceeded further with a two-stage approach by estimating an investment probit equation and calculating the inverse Millrsquos ratio that we add into the outcome financial choices equations at the second stage of the analysis to test for the selection bias 15 We performed an independent sample t-test to check whether the rate of capacity utilization is statistically significantly higher for investing firms compared to non-investing firms for our sample The null hypothesis of no difference was rejected at 1 level of significance 16 To economize on space we do not report the results of the investment probit equation but they are available from authorsrsquo upon request
18
Finally In Table 6 we attempt to condition the determinants of financing constraints
declared by SMEs on the relative percentage increase of trade credit in total funds used for
real investment As mentioned above in Section 2 the timings of measuring the composition
of financing sources precede by a year the timings of measuring the perceptions of financing
constraints That feature of the BEEPSrsquo design allays a likely concern about the endogeneity
of the relative proportion of trade credit and enables causal inference We too report in thre
note to Table 4 the adjusted marginal effects for the interaction term of the SME dummy with
the trade credit variable
In the next section we discuss our empirical results
5 Empirical Results
Table 3 reports the results of the probit model with the marginal effects for firmsrsquo
perception of financial constraints while Tables 4-5 summarize the results of SURE tobits for
a more detailed breakdown of five financing choices More specifically Table 4 reports the
results based on the whole sample to give a comparative perspective on SMErsquos financing
strategy vis-a-vis large businesses whereas Table 5 reports the results based on a
subsample of small and medium-sized firms to shed some light on their financing choices in
the period of crisis
Perception of financial constraints
Table 3 shows that generally small and medium-sized enterprises feel more financially
constrained with the coefficient for SME dummy in relation to the large firms being positive
and significant which is consistent with our discussion in sections 2-3 However the
coefficient of the interaction term with the Crisis dummy turns out to be negative and
significant in relation to the perception of financial constraints as a major obstacle and it
tends to outweigh the effect of a SME dummy when we calculate marginal effects The effect
of the interaction terms with the crisis remains robust after we adjust for non-linearity using
the framework proposed by Norton Wang and Ai (2004)17 Overall these results confirm
that small and medium-sized enterprises are much less financially constrained during the
crisis years with their perceptions close to those of the large firms This result is a polar
opposite to that obtained for the SMEs in the UK (Fraser 2009) which finds that not only do
SMEs generally feel more financially constrained but they report to be even more so during
17 We also check the robustness of our results to the potential problem of multicollinearity between a crisis dummy and its interaction term with SME by splitting a sample and testing the same specification separately for SMEs and large firms We also perform another robustness check by breaking a SME dummy into three subsequent dummies namely micro- small- and medium-sized firms The difference in perception of financial constraints gets almost eliminated in the case of small firms and is largely reduced in the case of micro firms whereas it is less so for medium-sized firms
19
the last crisis We could explain this striking difference by the peculiarities of the SMEs
functioning in new emerging economies The lower reliance of SMEs on external debt in
good times (as shown by results which are discussed below) gives SMEs some flexibility
during the crisis when formal financial markets dry up Jointly with overall flexibility to make
necessary cost cuts and to restructure a business this overall lower reliance on external
funding and the use of alternative sources of financing makes SMEs feel less financially
constrained under the crisis as compared to larger firms
We also find that a more developed financial sector as proxied by domestic private
credit as proportion of GDP helps ease up financial constraints This is in line with the
general literature suggesting that better functioning financial intermediaries facilitate the risk
amelioration in the presence of problems created by market frictions (Levine 1997 Barth et
al 2006 Barth et al 2008)
Unfortunately we fail to find any significant effect of the property rights protection on
firmsrsquo perception of financial constraints that may be explained by the fact that the effect of a
more developed financial sector is likely to outweigh the effect of the property rights
protection
Finally we also find that foreign ownership and international product certificate may
reduce firmsrsquo borrowing constraints while any pressure from domestic or foreign competition
so is pressure from the customers to innovate will increase firmrsquos perception of financial
constraints as major given that firms envisage the need to secure external funding for RampD
or any other innovation-related activities
Financing choices for investment in fixed assets
The results in Table 4 indicate that small enterprises tend to rely more on internal funds
and less on bank loans but they are no different from larger firms in respect of using informal
funds trade credit or private equity which is generally consistent with our discussion in
Sections 2 and 3 The results of Table 5 suggest however that under crisis small and
medium-sized firms tend to switch to other sources of finance such as trade credit and
ownerrsquos contributed equity and to respectively reduce the reliance on retained earnings
perhaps because they decrease due to the negative impact of crisis internal funds With
regards to our discussion of SMEsrsquo risk management we note that the use of private equity
(ownerrsquos contribution) during the crisis years increases which could indicate that the ownerrsquos
funds are used as a cushion in the period of financial distress
An interesting insight regarding the use of trade credit emerges for SMEs in our
sample although in non-crisis years small and medium-sized businesses are not significantly
different from larger firms in terms of reliance on trade credit SMEs tend to finance a
significantly higher proportion of their fixed asset investment by trade credit than large firms
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Aidis R Estrin S Mickiewicz T 2010 Size matters entrepreneurial entry and
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Arnold G 2008 Corporate Financial Management 4th Edition Prentice Hall
Atanasova and Wilson 2003 Bank Borrowing Constraints and the Demand for Trade Credit
Evidence from Panel Data Managerial and Decision Economics Special Issue The
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Atanasova and Wilson 2004 Disequilibrium in the UK corporate loan market Journal of
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Barth J G Caprio and R Levine 2006 Rethinking Bank Regulation Till Angels Govern
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Barth J G Caprio and R Levine 2008 Bank Regulations Are Changing For Better or
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Growth Does the Firm Size Matterrdquo The Journal of Finance Vol LX No1 February
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Beck T A Demirguumlccedil-Kunt L Laeven and V Maksimovic (2006) ldquoThe Determinants of
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Beck T A Demirguumlccedil-Kunt and V Maksimovic 2008 ldquoFinancial Patterns Around the World
Are Small Firms Differentrdquo Journal of Financial Economics 89(3) 467-487
Berger A amp G Udell 1998 The Economics of Small Business Finance The Role of
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Private Equity and Debt Markets in the Financial Growth Cycle Journal of Banking
and Finance 22 613ndash73
Berglof E and Bolton P 2002 The great divide and beyond financial architecture in
transition Journal of Economic Perspectives 16 (1 Winter) pp 77-100
Bernanke B S amp M Gertler 1995 Inside the Black Box The Credit Channel of Monetary
Policy Transmission NBER Working Papers 5146 National Bureau of Economic Research
Inc
Bernanke B M Gertler amp S Gilchrist 1998 The Financial Accelerator in a Quantitative
Business Cycle Framework in Taylor J amp M Woodford (ed) 1999 Handbook of
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Bevan A and J Danbolt 2002 Capital structure and its determinants in the UK - a
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Bygrave W 2003 Financing Entrepreneurs and their Ventures In P Reynolds W Bygrave
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Calderon C Didier T 2009 Severity Of The Crisis And Its Transmission Channels World Bank LAC Research Report CantonE I Grilo J Monteagudo and P van der Zwan 2010 Investigating the Perceptions
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Chakraborty I 2008 Capital Structure in Emerging Stock Market The Case of India
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Commander SJ amp J Svejnar 2011 Business Environment Exports Ownership and Firm
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Cull R and L C Xu 2007 Formal Finance and Trade Credit during Chinarsquos Transition
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De La Torre AM Peria and S Schmukler 2008 Bank Involvement with SMEs Beyond
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Delcoure N 2007 The Determinants of Capital Structure in Transitional Economies
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International Review of Economics and Finance 16 400-415
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Estrin S and T Mickiewicz 2010 Entrepreneurship in Transition Economies The Role of
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Ge Y and J Qiu 2007 Financial Development Bank Discrimination and Trade Credit
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Fraser S 2009 Small Firms in the Credit Crisis Evidence from the UK Survey of SME Finances Economic and Social Research Council Report Available at httpwww2warwickacukfacsocwbsresearchcsmeresearchlatestsmall_firms_in_the_credit_crisis_v3-oct09pdf Herbane B 2011 Small business research Time for a crisis-based view International Small
Business Journal 28(1)43ndash64
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Financing in Eastern Europe World Bank Policy Research Working Paper 2933
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2011 Startup finance in the age of globalisation Emerging Markets Finance and Trade
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Levine R 1997 Financial Development and Economic Growth Views and Agenda Journal
of Economic Literature 35 (June) 688-726
Li K Yue H amp Zhao L 2009 Ownership Institutions and Capital Structure Evidence
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Lizal L and J Svejnar 2002 Investment credit rationing and the soft budget constraint
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Mateut S S Bougheas and P Mizen 2006 Trade credit bank lending and monetary
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Meltzer A H 1960 Mercantile Credit Monetary Policy and Size of Firms The Review of
Economics and Statistics 42 (4 ) (Nov 1960) 429-437
Mitra P amp Muravyev A amp M Schaffer 2008 Convergence in Institutions and Market
Outcomes Cross-Country and Time-Series Evidence from the BEEPS Surveys in Transition
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Modigliani F and MH Miller 1958 The Cost of Capital Corporation Finance and the
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Models The Stata Journal 4(2) 103-116
Petersen M A and R G Rajan 1997 Trade Credit Theory and Evidence Review of
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Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
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Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
Small- and Medium-sized Businesses in Central and Eastern Europe Journal of Business
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Evidence from Small and Medium Size Enterprises in Russia and Bulgaria Journal of
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Radygin A D A E Gontmakher M G Kuzyk I V Mezheraup H Swain Yu V
Simachiov N A Shmeleva and R M Entov 2005 The institution of Bankruptcy
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Rehman Shafiq 2011 The Effect of Financial Crisis on the Behaviour of Trade Credit A
Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
Roodman D 2009 Estimating Fully Observed Recursive Mixed-Process Models with cmp CGD Working Paper 168 Washington DC Center for Global Development Sprenger C 2002 ldquoOwnership and Corporate Governance in Russian Industry a Surveyrdquo
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Stijn Claessens and Konstantinos Tzioumis 2006 Measuring firmsrsquo access to finance
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Taketa G and K Udell 2007 Lending Channels and Financial Shocks The Case of Small
and Medium-Sized Enterprise Trade Credit and the Japanese Banking Crisis Monetary and
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Tornell A and F Westermann 2005 Boom-Bust Cycles and Financial Liberalization
Cambridge MA MIT Press
Verbeek M (2000) A Guide to Modern Econometrics John Wiley amp Sons New York
28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
Challenging Environments Journal of Small Business Management 49(1) 107-125
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International University of Manchester DOI httpdxdoiorg105257wbwdi2011-09
Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
14
To test our main hypothesis of the effect of a firm size on firmsrsquo perception of financial
constraints we introduce a dummy variable denoting small and medium-sized business
coded as 1 if firms are classified as small or medium-sized businesses according to the EU
definition based on the employment criterion For robustness of our results we also use a
continuous variable denoting a size of employment as measured by the natural logarithm of
employment9 The obtained results are consistent with the ones using the SME indicators
To capture the effect of the recent financial crisis we introduce a crisis dummy coded
as 1 if the year of survey is equal to 2008 or 200910
We also introduce a number of firm-level controls which include age of firm11 type of
ownership including private and foreign ownership export orientation and whether a firm
has an internationally certified product all equal to 1 if a business has a respectively listed
characteristic and zero otherwise We also examine the effect of various sources of pressure
on firms to innovate ndash the indicators which are considered to be important for firm investment
decisions Respectively the pressure for innovation may stem from domestic competition
foreign competition and customers To capture the effect of a firmrsquos social capital we
introduce an indicator which indirectly may capture some possible connections of a firm with
authorities It is proxied by time spent by each firm on dealing with government regulations
We assume the less time firms spend dealing with government regulations the more likely
they have some established connections with public officials which allow them to avoid
burdensome regulation procedures
In our study we also introduce a number of country-level variables which characterize
the institutional environment in the countries covered by our sample More specifically we
include an indicator of the financial development as measured by the ratio of domestic credit
to private sector to GDP (one year lag to avoid potential endogeneity) obtained from the
World Bank World Development Indicators (World Bank 2011) This measure has been used
in previous studies (Klapper et al 2006) and it is expected to be of a primary importance for
transition economies where firms tend to rely more on bank finance rather than capital
markets We also introduce a measure of property rights protection (a one year lag) proxied
by the indicator of effective constraints imposed on the executive branch of the government
and obtained from Polity IV project12 This measure of property rights protection is
9 These results are not reported here to save some space However they can be obtained from authors upon request 10 Here it is important to note that although the financial crisis has started in 2007 in the USA it spread to transition economies in 2008-2009 11 Some studies find a non-monotonic relationship between age and firm decision-making In this study we introduce a squared term of age along with a age variable to capture this possible non-linearity 12 Available from httpwwwsystemicpeaceorgpolitypolity4htm
15
considered to be superior to other indicators including the index of property rights reported
by the Heritage Foundation ndashWall Street Journal (for further discussion see Acemoglu and
Johnson 2005 Glaeser et al 2004 Estrin Korosteleva and Mickieiwcz 2011)
In the present study we also introduce macroeconomic controls including cyclical
economic performance as measured by the one year lag of the GDP annual growth rate
and the level of economic development as proxied by a set of GDP pc dummies denoting
the five quintiles of its distribution to address the problem of potential multicollinearity with the
measure of financial development
Finally we include industry and country controls in all our specifications Introducing
country dummies into analysis allows to control for cross-country heterogeneity
For further definition of all variables their descriptive statistics and correlation matrix
see Tables 1-2
43 Dependent variables
To investigate the effect of a firmrsquos size on its perception of financial constraints we
construct a dummy variable coded as 1 capturing a major and very severe obstacle for
access to finance and 0 otherwise
The firm financing choices are defined by the five individual dependent variables
associated with tobit financial choice equations in the seemingly unrelated regression
equations model
One important thing to mention here is the inability to distinguish between
owninternal funds and external private equity considered as one of the limitations of the
2002-2009 BEEPS dataset In the period under investigation BEEPS offers two questions
which aim to capture the use of equity The first one centres around retained earnings and
the second one shows ownersrsquo contributions and private equity or issued new equity
Following some theoretical considerations discussed in sections 2 and 3 in the context of
SMEs we expect the second element of equity to be primarily comprised of existing ownersrsquo
new contributions rather than private equity
Thus the indicator of financial choices represents a set of five individual dependent
variables including retained earnings contributed earnings private borrowing informal
finance trade credit with each of them constructed as a share in total financing of SMErsquos
investment decisions (see Table 1)
44 Methods
16
In this study we employ a number of estimators to obtain robust results More
specifically we use a probit model to investigate the effect of a firm size and the recent
financial crisis on firmsrsquo perception of financial constraints The effect of a firm size in the
situation of crisis is captured by the introduction of the interaction term between firm size as
proxied by the SME indicator and a financial crisis dummy
We further employ the seemingly unrelated regression equations model combined
with the tobit approach for studying firmsrsquo financial structure
Probit model of perception of financial constraints
In the probit model the probability of a firmrsquos perception of financial constraints as
major(j = 1) can be written as follows
( ) ( )int ++
++
infinminus
minus===
ijitj uXjitiitit ijitjuXjy uX
βα βαππ 212-
)()(2 21exp|Pr
Where ity is our measure of financial constraints as perceived by firms and itX is a
set of our explanatory variables discussed in detail in sections 3-4 Here it is important to
note that the interaction term in a probit model cannot be interpreted in a similar way as in
linear models and disregarding this may lead to misleading estimates of the interaction
effect which is of crucial importance for our study (Norton Wang and Ai 2004) Respectively
for robustness of our results here we follow the framework suggested by Norton Wang and
Ai (2004) to account for the model nonlinearity The adjusted marginal effects for the
interaction term are reported in the note to Table 313
Simultaneous Model of Financing Choices
As mentioned above we next model the choice of all five financing choices explicitly
We also hypothesise (following Isachenkova et al 2011) that firm financing choices are likely
to be determined jointly A standard way of modelling jointly determined indicators is a
system of equations - SURE ndash seemingly unrelated regression equations where equations
are linked only by their errors (Zellner 1962) We therefore model the five types of sources of
finance (internal funds private bank borrowing informal finance trade credit and private
13 We also run a probit regression for a split sample of (1) SMEs and (2) large firms to check the robustness of our results (based on the interaction term) while addressing a problem of multicollinearity between a crisis variable and its interaction term with a SME variable The correlation coefficient between a crisis variable and its interaction term with a SME variable is equal to 93 This can be attributed by the problem of a sample being overrepresented by SMEs which constitute 90 of all surveyed firms The results remain robust and can be available from authors upon request
17
equity) using a SURE framework within which we specify a set of five tobit regressions with
correlated residuals
We employ the STATA cmp module which allows to it Seemingly Unrelated Regressions
using the simulated likelihood method such as the Geweke Hajivassiliou and Keane (GHK)
algorithm (for further discussion see Roodman 2008) We utilise a tobit equation to model
each individual financial choice of firms because our dependent financing choices variables
are continuous but their range is constrained (censored) with a substantial number of
observations either equal to zero denoting those who do not use the respective source of
finance or to 100 showing the opposite Other observations are positive and may produce
many different outcomes (Verbeek 2000) Each tobit equation uses a set of identical
explanatory variables that proxy factors which could possibly be associated with firmrsquos
financing choices including industry and country dummies
We also considered the bias caused by potential interdependence between the choice of
whether to invest and firmrsquos financing choices We accounted for the potential selection bias
by introducing into the financial choices SURE Tobit equations (second stage outcome
equations14) the inverse Millrsquos ratio calculated based on modelling the choice to invest in
fixed assets (first stage or selection equation) To identify the first stage of the Heckman
selection model we chose a variable which is correlated with the first stage dependent
variable (investment decision) but not with the second ones (financing choices) We used the
rate of capacity utilization as part of our identification strategy Capacity utilization shows the
percentage of capital stock in use the higher is the rate the more likely firms will increase
investment Batyaeva and Aukutsionek (2001) show that the rate of capacity utilization is
higher in the group of investing firms than in the group of non-investing firms in Russia15 We
calculated the inverse Millrsquos ratio based on the above selection equation16 and included it as
a control in the second stage SURE Tobit equations The inverse Millrsquos ratio has only proved
to be statistically significant in the private bank loan equation pointing to the potential
selection bias arising from the possibility that the factors determining the decision to invest
might differ from those determining the use of bank financing in purchasing fixed assets
14 We also attempted to estimate an investment equation jointly with Tobit financial choices equations within the SURE framework using However given the overall complexity of the model we failed to do this We proceeded further with a two-stage approach by estimating an investment probit equation and calculating the inverse Millrsquos ratio that we add into the outcome financial choices equations at the second stage of the analysis to test for the selection bias 15 We performed an independent sample t-test to check whether the rate of capacity utilization is statistically significantly higher for investing firms compared to non-investing firms for our sample The null hypothesis of no difference was rejected at 1 level of significance 16 To economize on space we do not report the results of the investment probit equation but they are available from authorsrsquo upon request
18
Finally In Table 6 we attempt to condition the determinants of financing constraints
declared by SMEs on the relative percentage increase of trade credit in total funds used for
real investment As mentioned above in Section 2 the timings of measuring the composition
of financing sources precede by a year the timings of measuring the perceptions of financing
constraints That feature of the BEEPSrsquo design allays a likely concern about the endogeneity
of the relative proportion of trade credit and enables causal inference We too report in thre
note to Table 4 the adjusted marginal effects for the interaction term of the SME dummy with
the trade credit variable
In the next section we discuss our empirical results
5 Empirical Results
Table 3 reports the results of the probit model with the marginal effects for firmsrsquo
perception of financial constraints while Tables 4-5 summarize the results of SURE tobits for
a more detailed breakdown of five financing choices More specifically Table 4 reports the
results based on the whole sample to give a comparative perspective on SMErsquos financing
strategy vis-a-vis large businesses whereas Table 5 reports the results based on a
subsample of small and medium-sized firms to shed some light on their financing choices in
the period of crisis
Perception of financial constraints
Table 3 shows that generally small and medium-sized enterprises feel more financially
constrained with the coefficient for SME dummy in relation to the large firms being positive
and significant which is consistent with our discussion in sections 2-3 However the
coefficient of the interaction term with the Crisis dummy turns out to be negative and
significant in relation to the perception of financial constraints as a major obstacle and it
tends to outweigh the effect of a SME dummy when we calculate marginal effects The effect
of the interaction terms with the crisis remains robust after we adjust for non-linearity using
the framework proposed by Norton Wang and Ai (2004)17 Overall these results confirm
that small and medium-sized enterprises are much less financially constrained during the
crisis years with their perceptions close to those of the large firms This result is a polar
opposite to that obtained for the SMEs in the UK (Fraser 2009) which finds that not only do
SMEs generally feel more financially constrained but they report to be even more so during
17 We also check the robustness of our results to the potential problem of multicollinearity between a crisis dummy and its interaction term with SME by splitting a sample and testing the same specification separately for SMEs and large firms We also perform another robustness check by breaking a SME dummy into three subsequent dummies namely micro- small- and medium-sized firms The difference in perception of financial constraints gets almost eliminated in the case of small firms and is largely reduced in the case of micro firms whereas it is less so for medium-sized firms
19
the last crisis We could explain this striking difference by the peculiarities of the SMEs
functioning in new emerging economies The lower reliance of SMEs on external debt in
good times (as shown by results which are discussed below) gives SMEs some flexibility
during the crisis when formal financial markets dry up Jointly with overall flexibility to make
necessary cost cuts and to restructure a business this overall lower reliance on external
funding and the use of alternative sources of financing makes SMEs feel less financially
constrained under the crisis as compared to larger firms
We also find that a more developed financial sector as proxied by domestic private
credit as proportion of GDP helps ease up financial constraints This is in line with the
general literature suggesting that better functioning financial intermediaries facilitate the risk
amelioration in the presence of problems created by market frictions (Levine 1997 Barth et
al 2006 Barth et al 2008)
Unfortunately we fail to find any significant effect of the property rights protection on
firmsrsquo perception of financial constraints that may be explained by the fact that the effect of a
more developed financial sector is likely to outweigh the effect of the property rights
protection
Finally we also find that foreign ownership and international product certificate may
reduce firmsrsquo borrowing constraints while any pressure from domestic or foreign competition
so is pressure from the customers to innovate will increase firmrsquos perception of financial
constraints as major given that firms envisage the need to secure external funding for RampD
or any other innovation-related activities
Financing choices for investment in fixed assets
The results in Table 4 indicate that small enterprises tend to rely more on internal funds
and less on bank loans but they are no different from larger firms in respect of using informal
funds trade credit or private equity which is generally consistent with our discussion in
Sections 2 and 3 The results of Table 5 suggest however that under crisis small and
medium-sized firms tend to switch to other sources of finance such as trade credit and
ownerrsquos contributed equity and to respectively reduce the reliance on retained earnings
perhaps because they decrease due to the negative impact of crisis internal funds With
regards to our discussion of SMEsrsquo risk management we note that the use of private equity
(ownerrsquos contribution) during the crisis years increases which could indicate that the ownerrsquos
funds are used as a cushion in the period of financial distress
An interesting insight regarding the use of trade credit emerges for SMEs in our
sample although in non-crisis years small and medium-sized businesses are not significantly
different from larger firms in terms of reliance on trade credit SMEs tend to finance a
significantly higher proportion of their fixed asset investment by trade credit than large firms
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Arnold G 2008 Corporate Financial Management 4th Edition Prentice Hall
Atanasova and Wilson 2003 Bank Borrowing Constraints and the Demand for Trade Credit
Evidence from Panel Data Managerial and Decision Economics Special Issue The
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Barth J G Caprio and R Levine 2006 Rethinking Bank Regulation Till Angels Govern
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Beck T A Demirguumlccedil-Kunt L Laeven and V Maksimovic (2006) ldquoThe Determinants of
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Beck T A Demirguumlccedil-Kunt and V Maksimovic 2008 ldquoFinancial Patterns Around the World
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Berger A amp G Udell 1998 The Economics of Small Business Finance The Role of
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Policy Transmission NBER Working Papers 5146 National Bureau of Economic Research
Inc
Bernanke B M Gertler amp S Gilchrist 1998 The Financial Accelerator in a Quantitative
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Cull R and L C Xu 2007 Formal Finance and Trade Credit during Chinarsquos Transition
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De La Torre AM Peria and S Schmukler 2008 Bank Involvement with SMEs Beyond
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Delcoure N 2007 The Determinants of Capital Structure in Transitional Economies
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International Review of Economics and Finance 16 400-415
Didier T Hevia C and Schmukler SL 2011 How Resilient Were Emerging Economies to the Global Crisis World Bank Policy Research Working Paper No 5637
Estrin S and T Mickiewicz 2010 Entrepreneurship in Transition Economies The Role of
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Fraser S 2009 Small Firms in the Credit Crisis Evidence from the UK Survey of SME Finances Economic and Social Research Council Report Available at httpwww2warwickacukfacsocwbsresearchcsmeresearchlatestsmall_firms_in_the_credit_crisis_v3-oct09pdf Herbane B 2011 Small business research Time for a crisis-based view International Small
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Financing in Eastern Europe World Bank Policy Research Working Paper 2933
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27
Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
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Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
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Septmeber 2011
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28
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Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
15
considered to be superior to other indicators including the index of property rights reported
by the Heritage Foundation ndashWall Street Journal (for further discussion see Acemoglu and
Johnson 2005 Glaeser et al 2004 Estrin Korosteleva and Mickieiwcz 2011)
In the present study we also introduce macroeconomic controls including cyclical
economic performance as measured by the one year lag of the GDP annual growth rate
and the level of economic development as proxied by a set of GDP pc dummies denoting
the five quintiles of its distribution to address the problem of potential multicollinearity with the
measure of financial development
Finally we include industry and country controls in all our specifications Introducing
country dummies into analysis allows to control for cross-country heterogeneity
For further definition of all variables their descriptive statistics and correlation matrix
see Tables 1-2
43 Dependent variables
To investigate the effect of a firmrsquos size on its perception of financial constraints we
construct a dummy variable coded as 1 capturing a major and very severe obstacle for
access to finance and 0 otherwise
The firm financing choices are defined by the five individual dependent variables
associated with tobit financial choice equations in the seemingly unrelated regression
equations model
One important thing to mention here is the inability to distinguish between
owninternal funds and external private equity considered as one of the limitations of the
2002-2009 BEEPS dataset In the period under investigation BEEPS offers two questions
which aim to capture the use of equity The first one centres around retained earnings and
the second one shows ownersrsquo contributions and private equity or issued new equity
Following some theoretical considerations discussed in sections 2 and 3 in the context of
SMEs we expect the second element of equity to be primarily comprised of existing ownersrsquo
new contributions rather than private equity
Thus the indicator of financial choices represents a set of five individual dependent
variables including retained earnings contributed earnings private borrowing informal
finance trade credit with each of them constructed as a share in total financing of SMErsquos
investment decisions (see Table 1)
44 Methods
16
In this study we employ a number of estimators to obtain robust results More
specifically we use a probit model to investigate the effect of a firm size and the recent
financial crisis on firmsrsquo perception of financial constraints The effect of a firm size in the
situation of crisis is captured by the introduction of the interaction term between firm size as
proxied by the SME indicator and a financial crisis dummy
We further employ the seemingly unrelated regression equations model combined
with the tobit approach for studying firmsrsquo financial structure
Probit model of perception of financial constraints
In the probit model the probability of a firmrsquos perception of financial constraints as
major(j = 1) can be written as follows
( ) ( )int ++
++
infinminus
minus===
ijitj uXjitiitit ijitjuXjy uX
βα βαππ 212-
)()(2 21exp|Pr
Where ity is our measure of financial constraints as perceived by firms and itX is a
set of our explanatory variables discussed in detail in sections 3-4 Here it is important to
note that the interaction term in a probit model cannot be interpreted in a similar way as in
linear models and disregarding this may lead to misleading estimates of the interaction
effect which is of crucial importance for our study (Norton Wang and Ai 2004) Respectively
for robustness of our results here we follow the framework suggested by Norton Wang and
Ai (2004) to account for the model nonlinearity The adjusted marginal effects for the
interaction term are reported in the note to Table 313
Simultaneous Model of Financing Choices
As mentioned above we next model the choice of all five financing choices explicitly
We also hypothesise (following Isachenkova et al 2011) that firm financing choices are likely
to be determined jointly A standard way of modelling jointly determined indicators is a
system of equations - SURE ndash seemingly unrelated regression equations where equations
are linked only by their errors (Zellner 1962) We therefore model the five types of sources of
finance (internal funds private bank borrowing informal finance trade credit and private
13 We also run a probit regression for a split sample of (1) SMEs and (2) large firms to check the robustness of our results (based on the interaction term) while addressing a problem of multicollinearity between a crisis variable and its interaction term with a SME variable The correlation coefficient between a crisis variable and its interaction term with a SME variable is equal to 93 This can be attributed by the problem of a sample being overrepresented by SMEs which constitute 90 of all surveyed firms The results remain robust and can be available from authors upon request
17
equity) using a SURE framework within which we specify a set of five tobit regressions with
correlated residuals
We employ the STATA cmp module which allows to it Seemingly Unrelated Regressions
using the simulated likelihood method such as the Geweke Hajivassiliou and Keane (GHK)
algorithm (for further discussion see Roodman 2008) We utilise a tobit equation to model
each individual financial choice of firms because our dependent financing choices variables
are continuous but their range is constrained (censored) with a substantial number of
observations either equal to zero denoting those who do not use the respective source of
finance or to 100 showing the opposite Other observations are positive and may produce
many different outcomes (Verbeek 2000) Each tobit equation uses a set of identical
explanatory variables that proxy factors which could possibly be associated with firmrsquos
financing choices including industry and country dummies
We also considered the bias caused by potential interdependence between the choice of
whether to invest and firmrsquos financing choices We accounted for the potential selection bias
by introducing into the financial choices SURE Tobit equations (second stage outcome
equations14) the inverse Millrsquos ratio calculated based on modelling the choice to invest in
fixed assets (first stage or selection equation) To identify the first stage of the Heckman
selection model we chose a variable which is correlated with the first stage dependent
variable (investment decision) but not with the second ones (financing choices) We used the
rate of capacity utilization as part of our identification strategy Capacity utilization shows the
percentage of capital stock in use the higher is the rate the more likely firms will increase
investment Batyaeva and Aukutsionek (2001) show that the rate of capacity utilization is
higher in the group of investing firms than in the group of non-investing firms in Russia15 We
calculated the inverse Millrsquos ratio based on the above selection equation16 and included it as
a control in the second stage SURE Tobit equations The inverse Millrsquos ratio has only proved
to be statistically significant in the private bank loan equation pointing to the potential
selection bias arising from the possibility that the factors determining the decision to invest
might differ from those determining the use of bank financing in purchasing fixed assets
14 We also attempted to estimate an investment equation jointly with Tobit financial choices equations within the SURE framework using However given the overall complexity of the model we failed to do this We proceeded further with a two-stage approach by estimating an investment probit equation and calculating the inverse Millrsquos ratio that we add into the outcome financial choices equations at the second stage of the analysis to test for the selection bias 15 We performed an independent sample t-test to check whether the rate of capacity utilization is statistically significantly higher for investing firms compared to non-investing firms for our sample The null hypothesis of no difference was rejected at 1 level of significance 16 To economize on space we do not report the results of the investment probit equation but they are available from authorsrsquo upon request
18
Finally In Table 6 we attempt to condition the determinants of financing constraints
declared by SMEs on the relative percentage increase of trade credit in total funds used for
real investment As mentioned above in Section 2 the timings of measuring the composition
of financing sources precede by a year the timings of measuring the perceptions of financing
constraints That feature of the BEEPSrsquo design allays a likely concern about the endogeneity
of the relative proportion of trade credit and enables causal inference We too report in thre
note to Table 4 the adjusted marginal effects for the interaction term of the SME dummy with
the trade credit variable
In the next section we discuss our empirical results
5 Empirical Results
Table 3 reports the results of the probit model with the marginal effects for firmsrsquo
perception of financial constraints while Tables 4-5 summarize the results of SURE tobits for
a more detailed breakdown of five financing choices More specifically Table 4 reports the
results based on the whole sample to give a comparative perspective on SMErsquos financing
strategy vis-a-vis large businesses whereas Table 5 reports the results based on a
subsample of small and medium-sized firms to shed some light on their financing choices in
the period of crisis
Perception of financial constraints
Table 3 shows that generally small and medium-sized enterprises feel more financially
constrained with the coefficient for SME dummy in relation to the large firms being positive
and significant which is consistent with our discussion in sections 2-3 However the
coefficient of the interaction term with the Crisis dummy turns out to be negative and
significant in relation to the perception of financial constraints as a major obstacle and it
tends to outweigh the effect of a SME dummy when we calculate marginal effects The effect
of the interaction terms with the crisis remains robust after we adjust for non-linearity using
the framework proposed by Norton Wang and Ai (2004)17 Overall these results confirm
that small and medium-sized enterprises are much less financially constrained during the
crisis years with their perceptions close to those of the large firms This result is a polar
opposite to that obtained for the SMEs in the UK (Fraser 2009) which finds that not only do
SMEs generally feel more financially constrained but they report to be even more so during
17 We also check the robustness of our results to the potential problem of multicollinearity between a crisis dummy and its interaction term with SME by splitting a sample and testing the same specification separately for SMEs and large firms We also perform another robustness check by breaking a SME dummy into three subsequent dummies namely micro- small- and medium-sized firms The difference in perception of financial constraints gets almost eliminated in the case of small firms and is largely reduced in the case of micro firms whereas it is less so for medium-sized firms
19
the last crisis We could explain this striking difference by the peculiarities of the SMEs
functioning in new emerging economies The lower reliance of SMEs on external debt in
good times (as shown by results which are discussed below) gives SMEs some flexibility
during the crisis when formal financial markets dry up Jointly with overall flexibility to make
necessary cost cuts and to restructure a business this overall lower reliance on external
funding and the use of alternative sources of financing makes SMEs feel less financially
constrained under the crisis as compared to larger firms
We also find that a more developed financial sector as proxied by domestic private
credit as proportion of GDP helps ease up financial constraints This is in line with the
general literature suggesting that better functioning financial intermediaries facilitate the risk
amelioration in the presence of problems created by market frictions (Levine 1997 Barth et
al 2006 Barth et al 2008)
Unfortunately we fail to find any significant effect of the property rights protection on
firmsrsquo perception of financial constraints that may be explained by the fact that the effect of a
more developed financial sector is likely to outweigh the effect of the property rights
protection
Finally we also find that foreign ownership and international product certificate may
reduce firmsrsquo borrowing constraints while any pressure from domestic or foreign competition
so is pressure from the customers to innovate will increase firmrsquos perception of financial
constraints as major given that firms envisage the need to secure external funding for RampD
or any other innovation-related activities
Financing choices for investment in fixed assets
The results in Table 4 indicate that small enterprises tend to rely more on internal funds
and less on bank loans but they are no different from larger firms in respect of using informal
funds trade credit or private equity which is generally consistent with our discussion in
Sections 2 and 3 The results of Table 5 suggest however that under crisis small and
medium-sized firms tend to switch to other sources of finance such as trade credit and
ownerrsquos contributed equity and to respectively reduce the reliance on retained earnings
perhaps because they decrease due to the negative impact of crisis internal funds With
regards to our discussion of SMEsrsquo risk management we note that the use of private equity
(ownerrsquos contribution) during the crisis years increases which could indicate that the ownerrsquos
funds are used as a cushion in the period of financial distress
An interesting insight regarding the use of trade credit emerges for SMEs in our
sample although in non-crisis years small and medium-sized businesses are not significantly
different from larger firms in terms of reliance on trade credit SMEs tend to finance a
significantly higher proportion of their fixed asset investment by trade credit than large firms
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Financing in Eastern Europe World Bank Policy Research Working Paper 2933
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of Economic Literature 35 (June) 688-726
Li K Yue H amp Zhao L 2009 Ownership Institutions and Capital Structure Evidence
From China Journal of Comparative Economics 37 471-490
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Small- and Medium-sized Businesses in Central and Eastern Europe Journal of Business
Venturing 14 519-539
Pissarides F 2001 Financial Structure to Promote Private Sector Development in South-
Eastern Europe EBRD Working Paper No 64
Pissarides F M Singer and J Svejnar 2003 Objectives and Constraints of Entrepreneurs
Evidence from Small and Medium Size Enterprises in Russia and Bulgaria Journal of
Comparative Economics 31 503-531
Radygin A D A E Gontmakher M G Kuzyk I V Mezheraup H Swain Yu V
Simachiov N A Shmeleva and R M Entov 2005 The institution of Bankruptcy
Development Problems Areas of Reforming Consortium for Economic Policy Research and
Advice Moscow 2005
Ravid S and M Spiegel 1997 Optimal Financing Contracts for a Start-up with Unlimited
Operating Discretion Journal of Financial and Quantitative Analysis 32 269-86
Rostowski J ed 1995 Banking reform in Central Europe and the Soviet Union Budapest
Central University Press
Rehman Shafiq 2011 The Effect of Financial Crisis on the Behaviour of Trade Credit A
Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
Roodman D 2009 Estimating Fully Observed Recursive Mixed-Process Models with cmp CGD Working Paper 168 Washington DC Center for Global Development Sprenger C 2002 ldquoOwnership and Corporate Governance in Russian Industry a Surveyrdquo
EBRD Working Paper No70
Stijn Claessens and Konstantinos Tzioumis 2006 Measuring firmsrsquo access to finance
World Bank Working Paper
Taketa G and K Udell 2007 Lending Channels and Financial Shocks The Case of Small
and Medium-Sized Enterprise Trade Credit and the Japanese Banking Crisis Monetary and
Economic Studies Institute for Monetary and Economic Studies Bank of Japan 25(2) 1- 44
November
Tornell A and F Westermann 2005 Boom-Bust Cycles and Financial Liberalization
Cambridge MA MIT Press
Verbeek M (2000) A Guide to Modern Econometrics John Wiley amp Sons New York
28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
Challenging Environments Journal of Small Business Management 49(1) 107-125
World Bank (2011) World Development Indicators (edition September 2011) ESDS
International University of Manchester DOI httpdxdoiorg105257wbwdi2011-09
Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
16
In this study we employ a number of estimators to obtain robust results More
specifically we use a probit model to investigate the effect of a firm size and the recent
financial crisis on firmsrsquo perception of financial constraints The effect of a firm size in the
situation of crisis is captured by the introduction of the interaction term between firm size as
proxied by the SME indicator and a financial crisis dummy
We further employ the seemingly unrelated regression equations model combined
with the tobit approach for studying firmsrsquo financial structure
Probit model of perception of financial constraints
In the probit model the probability of a firmrsquos perception of financial constraints as
major(j = 1) can be written as follows
( ) ( )int ++
++
infinminus
minus===
ijitj uXjitiitit ijitjuXjy uX
βα βαππ 212-
)()(2 21exp|Pr
Where ity is our measure of financial constraints as perceived by firms and itX is a
set of our explanatory variables discussed in detail in sections 3-4 Here it is important to
note that the interaction term in a probit model cannot be interpreted in a similar way as in
linear models and disregarding this may lead to misleading estimates of the interaction
effect which is of crucial importance for our study (Norton Wang and Ai 2004) Respectively
for robustness of our results here we follow the framework suggested by Norton Wang and
Ai (2004) to account for the model nonlinearity The adjusted marginal effects for the
interaction term are reported in the note to Table 313
Simultaneous Model of Financing Choices
As mentioned above we next model the choice of all five financing choices explicitly
We also hypothesise (following Isachenkova et al 2011) that firm financing choices are likely
to be determined jointly A standard way of modelling jointly determined indicators is a
system of equations - SURE ndash seemingly unrelated regression equations where equations
are linked only by their errors (Zellner 1962) We therefore model the five types of sources of
finance (internal funds private bank borrowing informal finance trade credit and private
13 We also run a probit regression for a split sample of (1) SMEs and (2) large firms to check the robustness of our results (based on the interaction term) while addressing a problem of multicollinearity between a crisis variable and its interaction term with a SME variable The correlation coefficient between a crisis variable and its interaction term with a SME variable is equal to 93 This can be attributed by the problem of a sample being overrepresented by SMEs which constitute 90 of all surveyed firms The results remain robust and can be available from authors upon request
17
equity) using a SURE framework within which we specify a set of five tobit regressions with
correlated residuals
We employ the STATA cmp module which allows to it Seemingly Unrelated Regressions
using the simulated likelihood method such as the Geweke Hajivassiliou and Keane (GHK)
algorithm (for further discussion see Roodman 2008) We utilise a tobit equation to model
each individual financial choice of firms because our dependent financing choices variables
are continuous but their range is constrained (censored) with a substantial number of
observations either equal to zero denoting those who do not use the respective source of
finance or to 100 showing the opposite Other observations are positive and may produce
many different outcomes (Verbeek 2000) Each tobit equation uses a set of identical
explanatory variables that proxy factors which could possibly be associated with firmrsquos
financing choices including industry and country dummies
We also considered the bias caused by potential interdependence between the choice of
whether to invest and firmrsquos financing choices We accounted for the potential selection bias
by introducing into the financial choices SURE Tobit equations (second stage outcome
equations14) the inverse Millrsquos ratio calculated based on modelling the choice to invest in
fixed assets (first stage or selection equation) To identify the first stage of the Heckman
selection model we chose a variable which is correlated with the first stage dependent
variable (investment decision) but not with the second ones (financing choices) We used the
rate of capacity utilization as part of our identification strategy Capacity utilization shows the
percentage of capital stock in use the higher is the rate the more likely firms will increase
investment Batyaeva and Aukutsionek (2001) show that the rate of capacity utilization is
higher in the group of investing firms than in the group of non-investing firms in Russia15 We
calculated the inverse Millrsquos ratio based on the above selection equation16 and included it as
a control in the second stage SURE Tobit equations The inverse Millrsquos ratio has only proved
to be statistically significant in the private bank loan equation pointing to the potential
selection bias arising from the possibility that the factors determining the decision to invest
might differ from those determining the use of bank financing in purchasing fixed assets
14 We also attempted to estimate an investment equation jointly with Tobit financial choices equations within the SURE framework using However given the overall complexity of the model we failed to do this We proceeded further with a two-stage approach by estimating an investment probit equation and calculating the inverse Millrsquos ratio that we add into the outcome financial choices equations at the second stage of the analysis to test for the selection bias 15 We performed an independent sample t-test to check whether the rate of capacity utilization is statistically significantly higher for investing firms compared to non-investing firms for our sample The null hypothesis of no difference was rejected at 1 level of significance 16 To economize on space we do not report the results of the investment probit equation but they are available from authorsrsquo upon request
18
Finally In Table 6 we attempt to condition the determinants of financing constraints
declared by SMEs on the relative percentage increase of trade credit in total funds used for
real investment As mentioned above in Section 2 the timings of measuring the composition
of financing sources precede by a year the timings of measuring the perceptions of financing
constraints That feature of the BEEPSrsquo design allays a likely concern about the endogeneity
of the relative proportion of trade credit and enables causal inference We too report in thre
note to Table 4 the adjusted marginal effects for the interaction term of the SME dummy with
the trade credit variable
In the next section we discuss our empirical results
5 Empirical Results
Table 3 reports the results of the probit model with the marginal effects for firmsrsquo
perception of financial constraints while Tables 4-5 summarize the results of SURE tobits for
a more detailed breakdown of five financing choices More specifically Table 4 reports the
results based on the whole sample to give a comparative perspective on SMErsquos financing
strategy vis-a-vis large businesses whereas Table 5 reports the results based on a
subsample of small and medium-sized firms to shed some light on their financing choices in
the period of crisis
Perception of financial constraints
Table 3 shows that generally small and medium-sized enterprises feel more financially
constrained with the coefficient for SME dummy in relation to the large firms being positive
and significant which is consistent with our discussion in sections 2-3 However the
coefficient of the interaction term with the Crisis dummy turns out to be negative and
significant in relation to the perception of financial constraints as a major obstacle and it
tends to outweigh the effect of a SME dummy when we calculate marginal effects The effect
of the interaction terms with the crisis remains robust after we adjust for non-linearity using
the framework proposed by Norton Wang and Ai (2004)17 Overall these results confirm
that small and medium-sized enterprises are much less financially constrained during the
crisis years with their perceptions close to those of the large firms This result is a polar
opposite to that obtained for the SMEs in the UK (Fraser 2009) which finds that not only do
SMEs generally feel more financially constrained but they report to be even more so during
17 We also check the robustness of our results to the potential problem of multicollinearity between a crisis dummy and its interaction term with SME by splitting a sample and testing the same specification separately for SMEs and large firms We also perform another robustness check by breaking a SME dummy into three subsequent dummies namely micro- small- and medium-sized firms The difference in perception of financial constraints gets almost eliminated in the case of small firms and is largely reduced in the case of micro firms whereas it is less so for medium-sized firms
19
the last crisis We could explain this striking difference by the peculiarities of the SMEs
functioning in new emerging economies The lower reliance of SMEs on external debt in
good times (as shown by results which are discussed below) gives SMEs some flexibility
during the crisis when formal financial markets dry up Jointly with overall flexibility to make
necessary cost cuts and to restructure a business this overall lower reliance on external
funding and the use of alternative sources of financing makes SMEs feel less financially
constrained under the crisis as compared to larger firms
We also find that a more developed financial sector as proxied by domestic private
credit as proportion of GDP helps ease up financial constraints This is in line with the
general literature suggesting that better functioning financial intermediaries facilitate the risk
amelioration in the presence of problems created by market frictions (Levine 1997 Barth et
al 2006 Barth et al 2008)
Unfortunately we fail to find any significant effect of the property rights protection on
firmsrsquo perception of financial constraints that may be explained by the fact that the effect of a
more developed financial sector is likely to outweigh the effect of the property rights
protection
Finally we also find that foreign ownership and international product certificate may
reduce firmsrsquo borrowing constraints while any pressure from domestic or foreign competition
so is pressure from the customers to innovate will increase firmrsquos perception of financial
constraints as major given that firms envisage the need to secure external funding for RampD
or any other innovation-related activities
Financing choices for investment in fixed assets
The results in Table 4 indicate that small enterprises tend to rely more on internal funds
and less on bank loans but they are no different from larger firms in respect of using informal
funds trade credit or private equity which is generally consistent with our discussion in
Sections 2 and 3 The results of Table 5 suggest however that under crisis small and
medium-sized firms tend to switch to other sources of finance such as trade credit and
ownerrsquos contributed equity and to respectively reduce the reliance on retained earnings
perhaps because they decrease due to the negative impact of crisis internal funds With
regards to our discussion of SMEsrsquo risk management we note that the use of private equity
(ownerrsquos contribution) during the crisis years increases which could indicate that the ownerrsquos
funds are used as a cushion in the period of financial distress
An interesting insight regarding the use of trade credit emerges for SMEs in our
sample although in non-crisis years small and medium-sized businesses are not significantly
different from larger firms in terms of reliance on trade credit SMEs tend to finance a
significantly higher proportion of their fixed asset investment by trade credit than large firms
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Atanasova and Wilson 2003 Bank Borrowing Constraints and the Demand for Trade Credit
Evidence from Panel Data Managerial and Decision Economics Special Issue The
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Barth J G Caprio and R Levine 2006 Rethinking Bank Regulation Till Angels Govern
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Beck T A Demirguumlccedil-Kunt and V Maksimovic 2004 Financing patterns around the world
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Beck T A Demirguumlccedil-Kunt L Laeven and V Maksimovic (2006) ldquoThe Determinants of
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Beck T A Demirguumlccedil-Kunt and V Maksimovic 2008 ldquoFinancial Patterns Around the World
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Berger A amp G Udell 1998 The Economics of Small Business Finance The Role of
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and Finance 22 613ndash73
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Policy Transmission NBER Working Papers 5146 National Bureau of Economic Research
Inc
Bernanke B M Gertler amp S Gilchrist 1998 The Financial Accelerator in a Quantitative
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Bevan A and J Danbolt 2002 Capital structure and its determinants in the UK - a
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Bygrave W 2003 Financing Entrepreneurs and their Ventures In P Reynolds W Bygrave
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Chakraborty I 2008 Capital Structure in Emerging Stock Market The Case of India
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Performance Review of Economics and Statistics 931 309-337
Correa PG Fernandes AM amp Uregian C 2010 Technology Adoption and the Investment
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Cull R and L C Xu 2007 Formal Finance and Trade Credit during Chinarsquos Transition
World Bank Policy Research Working Paper 4204
De La Torre AM Peria and S Schmukler 2008 Bank Involvement with SMEs Beyond
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Delcoure N 2007 The Determinants of Capital Structure in Transitional Economies
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International Review of Economics and Finance 16 400-415
Didier T Hevia C and Schmukler SL 2011 How Resilient Were Emerging Economies to the Global Crisis World Bank Policy Research Working Paper No 5637
Estrin S and T Mickiewicz 2010 Entrepreneurship in Transition Economies The Role of
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httpftpizaorgdp5481pdf
Ge Y and J Qiu 2007 Financial Development Bank Discrimination and Trade Credit
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Economics 95(1) (Mar 1993) 43-64
Girma S Gong Y amp Gorg H 2008 Foreign Direct Investment Access to Finance and
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Fraser S 2009 Small Firms in the Credit Crisis Evidence from the UK Survey of SME Finances Economic and Social Research Council Report Available at httpwww2warwickacukfacsocwbsresearchcsmeresearchlatestsmall_firms_in_the_credit_crisis_v3-oct09pdf Herbane B 2011 Small business research Time for a crisis-based view International Small
Business Journal 28(1)43ndash64
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Financing in Eastern Europe World Bank Policy Research Working Paper 2933
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27
Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
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Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
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Radygin A D A E Gontmakher M G Kuzyk I V Mezheraup H Swain Yu V
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Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
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28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
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Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
17
equity) using a SURE framework within which we specify a set of five tobit regressions with
correlated residuals
We employ the STATA cmp module which allows to it Seemingly Unrelated Regressions
using the simulated likelihood method such as the Geweke Hajivassiliou and Keane (GHK)
algorithm (for further discussion see Roodman 2008) We utilise a tobit equation to model
each individual financial choice of firms because our dependent financing choices variables
are continuous but their range is constrained (censored) with a substantial number of
observations either equal to zero denoting those who do not use the respective source of
finance or to 100 showing the opposite Other observations are positive and may produce
many different outcomes (Verbeek 2000) Each tobit equation uses a set of identical
explanatory variables that proxy factors which could possibly be associated with firmrsquos
financing choices including industry and country dummies
We also considered the bias caused by potential interdependence between the choice of
whether to invest and firmrsquos financing choices We accounted for the potential selection bias
by introducing into the financial choices SURE Tobit equations (second stage outcome
equations14) the inverse Millrsquos ratio calculated based on modelling the choice to invest in
fixed assets (first stage or selection equation) To identify the first stage of the Heckman
selection model we chose a variable which is correlated with the first stage dependent
variable (investment decision) but not with the second ones (financing choices) We used the
rate of capacity utilization as part of our identification strategy Capacity utilization shows the
percentage of capital stock in use the higher is the rate the more likely firms will increase
investment Batyaeva and Aukutsionek (2001) show that the rate of capacity utilization is
higher in the group of investing firms than in the group of non-investing firms in Russia15 We
calculated the inverse Millrsquos ratio based on the above selection equation16 and included it as
a control in the second stage SURE Tobit equations The inverse Millrsquos ratio has only proved
to be statistically significant in the private bank loan equation pointing to the potential
selection bias arising from the possibility that the factors determining the decision to invest
might differ from those determining the use of bank financing in purchasing fixed assets
14 We also attempted to estimate an investment equation jointly with Tobit financial choices equations within the SURE framework using However given the overall complexity of the model we failed to do this We proceeded further with a two-stage approach by estimating an investment probit equation and calculating the inverse Millrsquos ratio that we add into the outcome financial choices equations at the second stage of the analysis to test for the selection bias 15 We performed an independent sample t-test to check whether the rate of capacity utilization is statistically significantly higher for investing firms compared to non-investing firms for our sample The null hypothesis of no difference was rejected at 1 level of significance 16 To economize on space we do not report the results of the investment probit equation but they are available from authorsrsquo upon request
18
Finally In Table 6 we attempt to condition the determinants of financing constraints
declared by SMEs on the relative percentage increase of trade credit in total funds used for
real investment As mentioned above in Section 2 the timings of measuring the composition
of financing sources precede by a year the timings of measuring the perceptions of financing
constraints That feature of the BEEPSrsquo design allays a likely concern about the endogeneity
of the relative proportion of trade credit and enables causal inference We too report in thre
note to Table 4 the adjusted marginal effects for the interaction term of the SME dummy with
the trade credit variable
In the next section we discuss our empirical results
5 Empirical Results
Table 3 reports the results of the probit model with the marginal effects for firmsrsquo
perception of financial constraints while Tables 4-5 summarize the results of SURE tobits for
a more detailed breakdown of five financing choices More specifically Table 4 reports the
results based on the whole sample to give a comparative perspective on SMErsquos financing
strategy vis-a-vis large businesses whereas Table 5 reports the results based on a
subsample of small and medium-sized firms to shed some light on their financing choices in
the period of crisis
Perception of financial constraints
Table 3 shows that generally small and medium-sized enterprises feel more financially
constrained with the coefficient for SME dummy in relation to the large firms being positive
and significant which is consistent with our discussion in sections 2-3 However the
coefficient of the interaction term with the Crisis dummy turns out to be negative and
significant in relation to the perception of financial constraints as a major obstacle and it
tends to outweigh the effect of a SME dummy when we calculate marginal effects The effect
of the interaction terms with the crisis remains robust after we adjust for non-linearity using
the framework proposed by Norton Wang and Ai (2004)17 Overall these results confirm
that small and medium-sized enterprises are much less financially constrained during the
crisis years with their perceptions close to those of the large firms This result is a polar
opposite to that obtained for the SMEs in the UK (Fraser 2009) which finds that not only do
SMEs generally feel more financially constrained but they report to be even more so during
17 We also check the robustness of our results to the potential problem of multicollinearity between a crisis dummy and its interaction term with SME by splitting a sample and testing the same specification separately for SMEs and large firms We also perform another robustness check by breaking a SME dummy into three subsequent dummies namely micro- small- and medium-sized firms The difference in perception of financial constraints gets almost eliminated in the case of small firms and is largely reduced in the case of micro firms whereas it is less so for medium-sized firms
19
the last crisis We could explain this striking difference by the peculiarities of the SMEs
functioning in new emerging economies The lower reliance of SMEs on external debt in
good times (as shown by results which are discussed below) gives SMEs some flexibility
during the crisis when formal financial markets dry up Jointly with overall flexibility to make
necessary cost cuts and to restructure a business this overall lower reliance on external
funding and the use of alternative sources of financing makes SMEs feel less financially
constrained under the crisis as compared to larger firms
We also find that a more developed financial sector as proxied by domestic private
credit as proportion of GDP helps ease up financial constraints This is in line with the
general literature suggesting that better functioning financial intermediaries facilitate the risk
amelioration in the presence of problems created by market frictions (Levine 1997 Barth et
al 2006 Barth et al 2008)
Unfortunately we fail to find any significant effect of the property rights protection on
firmsrsquo perception of financial constraints that may be explained by the fact that the effect of a
more developed financial sector is likely to outweigh the effect of the property rights
protection
Finally we also find that foreign ownership and international product certificate may
reduce firmsrsquo borrowing constraints while any pressure from domestic or foreign competition
so is pressure from the customers to innovate will increase firmrsquos perception of financial
constraints as major given that firms envisage the need to secure external funding for RampD
or any other innovation-related activities
Financing choices for investment in fixed assets
The results in Table 4 indicate that small enterprises tend to rely more on internal funds
and less on bank loans but they are no different from larger firms in respect of using informal
funds trade credit or private equity which is generally consistent with our discussion in
Sections 2 and 3 The results of Table 5 suggest however that under crisis small and
medium-sized firms tend to switch to other sources of finance such as trade credit and
ownerrsquos contributed equity and to respectively reduce the reliance on retained earnings
perhaps because they decrease due to the negative impact of crisis internal funds With
regards to our discussion of SMEsrsquo risk management we note that the use of private equity
(ownerrsquos contribution) during the crisis years increases which could indicate that the ownerrsquos
funds are used as a cushion in the period of financial distress
An interesting insight regarding the use of trade credit emerges for SMEs in our
sample although in non-crisis years small and medium-sized businesses are not significantly
different from larger firms in terms of reliance on trade credit SMEs tend to finance a
significantly higher proportion of their fixed asset investment by trade credit than large firms
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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November
Tornell A and F Westermann 2005 Boom-Bust Cycles and Financial Liberalization
Cambridge MA MIT Press
Verbeek M (2000) A Guide to Modern Econometrics John Wiley amp Sons New York
28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
Challenging Environments Journal of Small Business Management 49(1) 107-125
World Bank (2011) World Development Indicators (edition September 2011) ESDS
International University of Manchester DOI httpdxdoiorg105257wbwdi2011-09
Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
18
Finally In Table 6 we attempt to condition the determinants of financing constraints
declared by SMEs on the relative percentage increase of trade credit in total funds used for
real investment As mentioned above in Section 2 the timings of measuring the composition
of financing sources precede by a year the timings of measuring the perceptions of financing
constraints That feature of the BEEPSrsquo design allays a likely concern about the endogeneity
of the relative proportion of trade credit and enables causal inference We too report in thre
note to Table 4 the adjusted marginal effects for the interaction term of the SME dummy with
the trade credit variable
In the next section we discuss our empirical results
5 Empirical Results
Table 3 reports the results of the probit model with the marginal effects for firmsrsquo
perception of financial constraints while Tables 4-5 summarize the results of SURE tobits for
a more detailed breakdown of five financing choices More specifically Table 4 reports the
results based on the whole sample to give a comparative perspective on SMErsquos financing
strategy vis-a-vis large businesses whereas Table 5 reports the results based on a
subsample of small and medium-sized firms to shed some light on their financing choices in
the period of crisis
Perception of financial constraints
Table 3 shows that generally small and medium-sized enterprises feel more financially
constrained with the coefficient for SME dummy in relation to the large firms being positive
and significant which is consistent with our discussion in sections 2-3 However the
coefficient of the interaction term with the Crisis dummy turns out to be negative and
significant in relation to the perception of financial constraints as a major obstacle and it
tends to outweigh the effect of a SME dummy when we calculate marginal effects The effect
of the interaction terms with the crisis remains robust after we adjust for non-linearity using
the framework proposed by Norton Wang and Ai (2004)17 Overall these results confirm
that small and medium-sized enterprises are much less financially constrained during the
crisis years with their perceptions close to those of the large firms This result is a polar
opposite to that obtained for the SMEs in the UK (Fraser 2009) which finds that not only do
SMEs generally feel more financially constrained but they report to be even more so during
17 We also check the robustness of our results to the potential problem of multicollinearity between a crisis dummy and its interaction term with SME by splitting a sample and testing the same specification separately for SMEs and large firms We also perform another robustness check by breaking a SME dummy into three subsequent dummies namely micro- small- and medium-sized firms The difference in perception of financial constraints gets almost eliminated in the case of small firms and is largely reduced in the case of micro firms whereas it is less so for medium-sized firms
19
the last crisis We could explain this striking difference by the peculiarities of the SMEs
functioning in new emerging economies The lower reliance of SMEs on external debt in
good times (as shown by results which are discussed below) gives SMEs some flexibility
during the crisis when formal financial markets dry up Jointly with overall flexibility to make
necessary cost cuts and to restructure a business this overall lower reliance on external
funding and the use of alternative sources of financing makes SMEs feel less financially
constrained under the crisis as compared to larger firms
We also find that a more developed financial sector as proxied by domestic private
credit as proportion of GDP helps ease up financial constraints This is in line with the
general literature suggesting that better functioning financial intermediaries facilitate the risk
amelioration in the presence of problems created by market frictions (Levine 1997 Barth et
al 2006 Barth et al 2008)
Unfortunately we fail to find any significant effect of the property rights protection on
firmsrsquo perception of financial constraints that may be explained by the fact that the effect of a
more developed financial sector is likely to outweigh the effect of the property rights
protection
Finally we also find that foreign ownership and international product certificate may
reduce firmsrsquo borrowing constraints while any pressure from domestic or foreign competition
so is pressure from the customers to innovate will increase firmrsquos perception of financial
constraints as major given that firms envisage the need to secure external funding for RampD
or any other innovation-related activities
Financing choices for investment in fixed assets
The results in Table 4 indicate that small enterprises tend to rely more on internal funds
and less on bank loans but they are no different from larger firms in respect of using informal
funds trade credit or private equity which is generally consistent with our discussion in
Sections 2 and 3 The results of Table 5 suggest however that under crisis small and
medium-sized firms tend to switch to other sources of finance such as trade credit and
ownerrsquos contributed equity and to respectively reduce the reliance on retained earnings
perhaps because they decrease due to the negative impact of crisis internal funds With
regards to our discussion of SMEsrsquo risk management we note that the use of private equity
(ownerrsquos contribution) during the crisis years increases which could indicate that the ownerrsquos
funds are used as a cushion in the period of financial distress
An interesting insight regarding the use of trade credit emerges for SMEs in our
sample although in non-crisis years small and medium-sized businesses are not significantly
different from larger firms in terms of reliance on trade credit SMEs tend to finance a
significantly higher proportion of their fixed asset investment by trade credit than large firms
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
References
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113 943-995
Aidis R S Estrin and T Mickiewicz 2008 Institutions and Entrepreneurship Development in
Russia A Comparative Perspective Journal of Business Venturing 23(6)656-672
Aidis R Estrin S Mickiewicz T 2010 Size matters entrepreneurial entry and
government Small Business Economics DOI 101007s11187-010-9299-y
Arnold G 2008 Corporate Financial Management 4th Edition Prentice Hall
Atanasova and Wilson 2003 Bank Borrowing Constraints and the Demand for Trade Credit
Evidence from Panel Data Managerial and Decision Economics Special Issue The
Economics of Credit Management 24 (6-7) 503ndash514
Atanasova and Wilson 2004 Disequilibrium in the UK corporate loan market Journal of
Banking amp Finance 28 (March) 595-614
Barth J G Caprio and R Levine 2006 Rethinking Bank Regulation Till Angels Govern
Cambridge University Press New York
Barth J G Caprio and R Levine 2008 Bank Regulations Are Changing For Better or
Worse Working Paper Series 4646 World Bank Washington DC
Bates T 1997 Financial Business Creation The Case of Chinese and Korean Immigrant
Entrepreneurs Journal of Business Venturing 12109-124
Batyaeva A and S Aukutsionek (2001) Investment and Non-Investment in the Russian
Industry Journal of East-West Business 6(4) 5-22
Beck T and A de la Torre 2006 The basic analytics of access to financial services World
Bank Research Paper
Beck T A Demirguumlccedil-Kunt and V Maksimovic 2004 Financing patterns around the world
Are small firms different World Bank working paper
Beck T A Demirguumlccedil-Kunt and V Maksimovic (2005) ldquoFinancial and Legal Constraints to
Growth Does the Firm Size Matterrdquo The Journal of Finance Vol LX No1 February
2005
Beck T A Demirguumlccedil-Kunt L Laeven and V Maksimovic (2006) ldquoThe Determinants of
Financing Obstaclesrdquo The Journal of International Money and Finance 25 pp932-952
Beck T A Demirguumlccedil-Kunt and V Maksimovic 2008 ldquoFinancial Patterns Around the World
Are Small Firms Differentrdquo Journal of Financial Economics 89(3) 467-487
Berger A amp G Udell 1998 The Economics of Small Business Finance The Role of
24
Private Equity and Debt Markets in the Financial Growth Cycle Journal of Banking
and Finance 22 613ndash73
Berglof E and Bolton P 2002 The great divide and beyond financial architecture in
transition Journal of Economic Perspectives 16 (1 Winter) pp 77-100
Bernanke B S amp M Gertler 1995 Inside the Black Box The Credit Channel of Monetary
Policy Transmission NBER Working Papers 5146 National Bureau of Economic Research
Inc
Bernanke B M Gertler amp S Gilchrist 1998 The Financial Accelerator in a Quantitative
Business Cycle Framework in Taylor J amp M Woodford (ed) 1999 Handbook of
Macroeconomics Elsevier 1(1)
Bevan A and J Danbolt 2002 Capital structure and its determinants in the UK - a
decompositional analysis Applied Financial Economics 12(3) 159-170
Bygrave W 2003 Financing Entrepreneurs and their Ventures In P Reynolds W Bygrave
and E Autio eds Global Entrepreneurship Monitor 2003 Global Report Kansas City
Kauffman Center for Entrepreneurial Leadership at the Ewing Mario Kauffman Foundation
Calderon C Didier T 2009 Severity Of The Crisis And Its Transmission Channels World Bank LAC Research Report CantonE I Grilo J Monteagudo and P van der Zwan 2010 Investigating the Perceptions
of Credit Constraints in the European Union Erasmus Research Institute of Management
Report
Chakraborty I 2008 Capital Structure in Emerging Stock Market The Case of India
Research in International Business and Finance doi101016jribaf201002001
Chang C Lee A amp Lee C 2009 Determinants of Capital Structure Choice A Structural
Equation Modeling Approach Quarterly Journal of Economics and Finance 49 197-213
Commander SJ amp J Svejnar 2011 Business Environment Exports Ownership and Firm
Performance Review of Economics and Statistics 931 309-337
Correa PG Fernandes AM amp Uregian C 2010 Technology Adoption and the Investment
Climate Firm-Level Evidence for Eastern Europe and Central Asia The World
Bank Economic Review 24 121-147
Crnigoj M 2007 Risk Averse Insiders with Specific Objective Function and Capital
Structure Mimeo
Cull R and L C Xu 2007 Formal Finance and Trade Credit during Chinarsquos Transition
World Bank Policy Research Working Paper 4204
De La Torre AM Peria and S Schmukler 2008 Bank Involvement with SMEs Beyond
Relationship Lending Working Paper Series 4649 World Bank Washington DC
Delcoure N 2007 The Determinants of Capital Structure in Transitional Economies
25
International Review of Economics and Finance 16 400-415
Didier T Hevia C and Schmukler SL 2011 How Resilient Were Emerging Economies to the Global Crisis World Bank Policy Research Working Paper No 5637
Estrin S and T Mickiewicz 2010 Entrepreneurship in Transition Economies The Role of
Institutions Forthcoming in edited volume by M Minitti at Oxford UP
Estrin S J Korostelva and T Mickiewicz 2011 Which Institutions Encourage Entrepreneurs
to Create Larger Firms IZA Discussion Paper 5481 available from
httpftpizaorgdp5481pdf
Ge Y and J Qiu 2007 Financial Development Bank Discrimination and Trade Credit
Journal of Banking amp Finance 31 513ndash530
Gertler M and S Gilchrist 1993 The Role of Credit Market Imperfections in the Monetary
Transmission Mechanism Arguments and Evidence The Scandinavian Journal of
Economics 95(1) (Mar 1993) 43-64
Girma S Gong Y amp Gorg H 2008 Foreign Direct Investment Access to Finance and
Innovation Activity in Chinese Enterprises The World Bank Economic Review 22 367-382
Glaeser E R La Porta F Lopez-de-Silanes and A Shleifer Do Institutions Cause
Growth NBER Working Paper Series 10568 2004
Gorodnichenko Y and M Schnitzer 2010 Financial constraints and innovation Why poor
countries donrsquot catch up NBER working papers 15792 National Bureau of Economic
Research Inc
Fraser S 2009 Small Firms in the Credit Crisis Evidence from the UK Survey of SME Finances Economic and Social Research Council Report Available at httpwww2warwickacukfacsocwbsresearchcsmeresearchlatestsmall_firms_in_the_credit_crisis_v3-oct09pdf Herbane B 2011 Small business research Time for a crisis-based view International Small
Business Journal 28(1)43ndash64
Huyghebaert N 2001 The Capital Structure of the Business Start-ups Determinants of
Initial Capital Structure Review of Banking and Finance 284-88
Isachenkova N J Korosteleva and Y Rodionova 2011 Financing Choices A Study of
Entrepreneurial Firms in High-tech Industries CSESCE Working Paper No Centre for
the Study of Economic and Social Change in Europe UCL London
Johnson S J McMillan and C Woodruff 2002 Property Rights and Finance The American
Economic Review 92 (5)1335-1356
Klapper L V Sarria-Allende and V Sulla 2002 Small- and Medium-Size Enterprise
Financing in Eastern Europe World Bank Policy Research Working Paper 2933
26
Klapper L F and Randall D 2010 ldquoThe Impact of the Financial Crisis on Supply-Chain
Financingrdquo World Bank Group Enterprise note No 13Korosteleva J and Mickiewicz T
2011 Startup finance in the age of globalisation Emerging Markets Finance and Trade
47(3) 23-49
Korosteleva J and C Lawson (2010) The Belarusian Case of Transition Whither Financial
Repression Post-Communist Economies Vol 22(1)
Levine R 1997 Financial Development and Economic Growth Views and Agenda Journal
of Economic Literature 35 (June) 688-726
Li K Yue H amp Zhao L 2009 Ownership Institutions and Capital Structure Evidence
From China Journal of Comparative Economics 37 471-490
Lizal L and J Svejnar 2002 Investment credit rationing and the soft budget constraint
evidence from Czech panel data Review of Economics and Statistics 84(2) 353-370
Love I 2003 Financial development and financing constraints International evidence from
the structural investment model Review of Financial Studies 16(3) pp 765-79
Love I and R Zaidi 2010 Trade Credit Bank Credit and Financial Crisis International
Review of Finance 10(1) 125-147 March
Mateut S S Bougheas and P Mizen 2006 Trade credit bank lending and monetary
policy transmission European Economic Review 50(3) 603-629
Matthews C H and S G Scott1995 Uncertainty and Planning in Small and
Entrepreneurial Firms An Empirical Assessment Journal of Small Business management
23(4) 34-52
Meltzer A H 1960 Mercantile Credit Monetary Policy and Size of Firms The Review of
Economics and Statistics 42 (4 ) (Nov 1960) 429-437
Mitra P amp Muravyev A amp M Schaffer 2008 Convergence in Institutions and Market
Outcomes Cross-Country and Time-Series Evidence from the BEEPS Surveys in Transition
Economies IZA Discussion Papers 3863 Institute for the Study of Labor (IZA)
Modigliani F and MH Miller 1958 The Cost of Capital Corporation Finance and the
Theory of Investment American Economic Review 48(3) pp 261-97
Nielsen J H 2002 Trade Credit and the Bank Lending Channel Journal of Money Credit
and Banking 34 226-253
Nivorozhkin E 2005 Financing Choices of Firms in EU Accession Countries Emerging
Markets Review 6 138-169
Norton E Wang H and C Ai 2004 Computing Interaction Effects in Logit and Probit
Models The Stata Journal 4(2) 103-116
Petersen M A and R G Rajan 1997 Trade Credit Theory and Evidence Review of
Financial Studies 10 661ndash691
27
Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
No 33
Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
Small- and Medium-sized Businesses in Central and Eastern Europe Journal of Business
Venturing 14 519-539
Pissarides F 2001 Financial Structure to Promote Private Sector Development in South-
Eastern Europe EBRD Working Paper No 64
Pissarides F M Singer and J Svejnar 2003 Objectives and Constraints of Entrepreneurs
Evidence from Small and Medium Size Enterprises in Russia and Bulgaria Journal of
Comparative Economics 31 503-531
Radygin A D A E Gontmakher M G Kuzyk I V Mezheraup H Swain Yu V
Simachiov N A Shmeleva and R M Entov 2005 The institution of Bankruptcy
Development Problems Areas of Reforming Consortium for Economic Policy Research and
Advice Moscow 2005
Ravid S and M Spiegel 1997 Optimal Financing Contracts for a Start-up with Unlimited
Operating Discretion Journal of Financial and Quantitative Analysis 32 269-86
Rostowski J ed 1995 Banking reform in Central Europe and the Soviet Union Budapest
Central University Press
Rehman Shafiq 2011 The Effect of Financial Crisis on the Behaviour of Trade Credit A
Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
Roodman D 2009 Estimating Fully Observed Recursive Mixed-Process Models with cmp CGD Working Paper 168 Washington DC Center for Global Development Sprenger C 2002 ldquoOwnership and Corporate Governance in Russian Industry a Surveyrdquo
EBRD Working Paper No70
Stijn Claessens and Konstantinos Tzioumis 2006 Measuring firmsrsquo access to finance
World Bank Working Paper
Taketa G and K Udell 2007 Lending Channels and Financial Shocks The Case of Small
and Medium-Sized Enterprise Trade Credit and the Japanese Banking Crisis Monetary and
Economic Studies Institute for Monetary and Economic Studies Bank of Japan 25(2) 1- 44
November
Tornell A and F Westermann 2005 Boom-Bust Cycles and Financial Liberalization
Cambridge MA MIT Press
Verbeek M (2000) A Guide to Modern Econometrics John Wiley amp Sons New York
28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
Challenging Environments Journal of Small Business Management 49(1) 107-125
World Bank (2011) World Development Indicators (edition September 2011) ESDS
International University of Manchester DOI httpdxdoiorg105257wbwdi2011-09
Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
19
the last crisis We could explain this striking difference by the peculiarities of the SMEs
functioning in new emerging economies The lower reliance of SMEs on external debt in
good times (as shown by results which are discussed below) gives SMEs some flexibility
during the crisis when formal financial markets dry up Jointly with overall flexibility to make
necessary cost cuts and to restructure a business this overall lower reliance on external
funding and the use of alternative sources of financing makes SMEs feel less financially
constrained under the crisis as compared to larger firms
We also find that a more developed financial sector as proxied by domestic private
credit as proportion of GDP helps ease up financial constraints This is in line with the
general literature suggesting that better functioning financial intermediaries facilitate the risk
amelioration in the presence of problems created by market frictions (Levine 1997 Barth et
al 2006 Barth et al 2008)
Unfortunately we fail to find any significant effect of the property rights protection on
firmsrsquo perception of financial constraints that may be explained by the fact that the effect of a
more developed financial sector is likely to outweigh the effect of the property rights
protection
Finally we also find that foreign ownership and international product certificate may
reduce firmsrsquo borrowing constraints while any pressure from domestic or foreign competition
so is pressure from the customers to innovate will increase firmrsquos perception of financial
constraints as major given that firms envisage the need to secure external funding for RampD
or any other innovation-related activities
Financing choices for investment in fixed assets
The results in Table 4 indicate that small enterprises tend to rely more on internal funds
and less on bank loans but they are no different from larger firms in respect of using informal
funds trade credit or private equity which is generally consistent with our discussion in
Sections 2 and 3 The results of Table 5 suggest however that under crisis small and
medium-sized firms tend to switch to other sources of finance such as trade credit and
ownerrsquos contributed equity and to respectively reduce the reliance on retained earnings
perhaps because they decrease due to the negative impact of crisis internal funds With
regards to our discussion of SMEsrsquo risk management we note that the use of private equity
(ownerrsquos contribution) during the crisis years increases which could indicate that the ownerrsquos
funds are used as a cushion in the period of financial distress
An interesting insight regarding the use of trade credit emerges for SMEs in our
sample although in non-crisis years small and medium-sized businesses are not significantly
different from larger firms in terms of reliance on trade credit SMEs tend to finance a
significantly higher proportion of their fixed asset investment by trade credit than large firms
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Atanasova and Wilson 2003 Bank Borrowing Constraints and the Demand for Trade Credit
Evidence from Panel Data Managerial and Decision Economics Special Issue The
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Barth J G Caprio and R Levine 2006 Rethinking Bank Regulation Till Angels Govern
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Beck T A Demirguumlccedil-Kunt and V Maksimovic 2004 Financing patterns around the world
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Beck T A Demirguumlccedil-Kunt L Laeven and V Maksimovic (2006) ldquoThe Determinants of
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Beck T A Demirguumlccedil-Kunt and V Maksimovic 2008 ldquoFinancial Patterns Around the World
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Berger A amp G Udell 1998 The Economics of Small Business Finance The Role of
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and Finance 22 613ndash73
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Policy Transmission NBER Working Papers 5146 National Bureau of Economic Research
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Bernanke B M Gertler amp S Gilchrist 1998 The Financial Accelerator in a Quantitative
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Bevan A and J Danbolt 2002 Capital structure and its determinants in the UK - a
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Bygrave W 2003 Financing Entrepreneurs and their Ventures In P Reynolds W Bygrave
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Chakraborty I 2008 Capital Structure in Emerging Stock Market The Case of India
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Cull R and L C Xu 2007 Formal Finance and Trade Credit during Chinarsquos Transition
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De La Torre AM Peria and S Schmukler 2008 Bank Involvement with SMEs Beyond
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Delcoure N 2007 The Determinants of Capital Structure in Transitional Economies
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Didier T Hevia C and Schmukler SL 2011 How Resilient Were Emerging Economies to the Global Crisis World Bank Policy Research Working Paper No 5637
Estrin S and T Mickiewicz 2010 Entrepreneurship in Transition Economies The Role of
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httpftpizaorgdp5481pdf
Ge Y and J Qiu 2007 Financial Development Bank Discrimination and Trade Credit
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Girma S Gong Y amp Gorg H 2008 Foreign Direct Investment Access to Finance and
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Fraser S 2009 Small Firms in the Credit Crisis Evidence from the UK Survey of SME Finances Economic and Social Research Council Report Available at httpwww2warwickacukfacsocwbsresearchcsmeresearchlatestsmall_firms_in_the_credit_crisis_v3-oct09pdf Herbane B 2011 Small business research Time for a crisis-based view International Small
Business Journal 28(1)43ndash64
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Financing in Eastern Europe World Bank Policy Research Working Paper 2933
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27
Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
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Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
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Radygin A D A E Gontmakher M G Kuzyk I V Mezheraup H Swain Yu V
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Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
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28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
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Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
20
in the period of crisis While the latter finding is partly in line with some other studies ndash such
as Klapper and Randall (2010) using BEEPS data it is in stark contrast with similar studies
of the UK private firms (Rehman 2011) for which the use of trade credit is found to have
dried up in crisis This could partly be due to the passed legislation in the UK tightening trade
credit regulation as the result of the abuse of trade credit by large firms in relation to small
firms which forced many SMEs out of the market
With regards to the other firm-level characteristics international certification makes the
firm rely more on private bank loans and informal finance (Table 5) while SMEs with foreign
ownership rely less on private debt but more on retained earnings Both results are
consistent with our hypotheses discussed above Export-oriented small and medium-sized
businesses tend to have greater reliance on trade credit and they use less of internal funds
We find a non-monotonic relationship between age and private equity with both younger and
older firms being more reliant on this source of funding We find some fragmentary support
for private domestic SMEs relying more on informal finance while tending to use less trade
credit and private equity (Table 5)
Interestingly our results (Tables 4-5) suggest that firms which lack some social
connections with governmental officials proxied by the higher amount of time spent dealing
with government regulations are more likely to rely on informal finance trade credit and
private equity In turn businesses which are connected to governmental officials use more
retained profits to fund investment in fixed assets This may be attributed to their connections
serving as a guarantee from expropriation of assets by all sort of rent-seeking individuals
akin private contracting to secure property rights protection This result should be interpreted
jointly with the property rights protection results We expected that better property rights
protection is likely to facilitate firmsrsquo access to bank loan but we failed to confirm this
Perhaps regardless some attempts at a constitutional level to prevent arbitrary government
(which is proxied by our measure of property rights) expropriation culture is still deeply
embedded in the society of post-communist countries and it may manifest in different ways
Welter and Smallbone (2011) argue that entrepreneurs in transition economies have learnt
how to respond to institutional deficiencies in particular weak property rights protection For
example some businesses experiencing high growth choose to invest in unrelated
businesses instead of growing their core businesses for the reason they do not want to
become too noticeable to attract too much attention of the wrong sort In our instance having
some connections with officials seems also to serve as protection against arbitrary
government or individual rent-seeking that makes businesses more keen on re-investing their
retained profits (see Johnson et al (2002) on the discussion of how more secure property
rights can make small firms reinvest more of their earnings)
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Aidis R Estrin S Mickiewicz T 2010 Size matters entrepreneurial entry and
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Arnold G 2008 Corporate Financial Management 4th Edition Prentice Hall
Atanasova and Wilson 2003 Bank Borrowing Constraints and the Demand for Trade Credit
Evidence from Panel Data Managerial and Decision Economics Special Issue The
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Atanasova and Wilson 2004 Disequilibrium in the UK corporate loan market Journal of
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Barth J G Caprio and R Levine 2006 Rethinking Bank Regulation Till Angels Govern
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Beck T A Demirguumlccedil-Kunt L Laeven and V Maksimovic (2006) ldquoThe Determinants of
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Beck T A Demirguumlccedil-Kunt and V Maksimovic 2008 ldquoFinancial Patterns Around the World
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Berger A amp G Udell 1998 The Economics of Small Business Finance The Role of
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Private Equity and Debt Markets in the Financial Growth Cycle Journal of Banking
and Finance 22 613ndash73
Berglof E and Bolton P 2002 The great divide and beyond financial architecture in
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Policy Transmission NBER Working Papers 5146 National Bureau of Economic Research
Inc
Bernanke B M Gertler amp S Gilchrist 1998 The Financial Accelerator in a Quantitative
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Bevan A and J Danbolt 2002 Capital structure and its determinants in the UK - a
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Bygrave W 2003 Financing Entrepreneurs and their Ventures In P Reynolds W Bygrave
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Delcoure N 2007 The Determinants of Capital Structure in Transitional Economies
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Economics and Statistics 42 (4 ) (Nov 1960) 429-437
Mitra P amp Muravyev A amp M Schaffer 2008 Convergence in Institutions and Market
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Evidence from Small and Medium Size Enterprises in Russia and Bulgaria Journal of
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Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
Roodman D 2009 Estimating Fully Observed Recursive Mixed-Process Models with cmp CGD Working Paper 168 Washington DC Center for Global Development Sprenger C 2002 ldquoOwnership and Corporate Governance in Russian Industry a Surveyrdquo
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Stijn Claessens and Konstantinos Tzioumis 2006 Measuring firmsrsquo access to finance
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28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
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and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
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Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
21
Pressure from domestic competition and customers on a firm to develop a new
product which may be a characteristic of oligopolistic or monopolistic competition structure
makes a firm more likely to rely more on bank finance
Interestingly we find the use of outsourcing by SMEs (Table 5) strongly and robustly
significant in explaining access to external funding
Our results show that SMEs in countries with low GDP per capita (the first three
quartiles up to the level of USD 10468 at ppp) tend to rely more on internal funds and less
on bank finance
We also investigate whether an increase in the relative percentage of trade credit in the
financing mix affects small firmsrsquo perceptions of financing constraints To this end we
estimate a probit model that conditions on relative share of trade credit and includes an
interaction term for the SME dummy and trade credit Reported in Table 6 this model
confirms that during a crisis flexibility in switching to alternative sources of finance such as
trade credit could be a possible determinant of perceptions of financing constraints In
particular the increase in a relative percentage of trade credit in the firmrsquos financing mix
picks up a significant difference in financing constraints across the size categories and
positively affects the propensity of SMEs to declare themselves as less financially
constrained
Overall our findings regarding firm- and industry-specific characteristics and the impact
of the institutional variables in all three specifications are generally consistent with the
hypotheses and literature discussed in Sections 2 and 3 with some exceptions which we will
summarise in the next section
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
22
6 Conclusions
Our key results may be summarized as follows
Consistent with the literature smaller businesses generally feel more financially
constrained in accessing external funding given the small scale of their investment projects
inability to provide good collateral and higher risk implying that financial institutions find it
costly to monitor small businesses
However in the situation of crisis as exemplified by the recent financial crisis which in
the 2008-09 spread to the transition economies the difference in perception of financial
constraints between smaller and larger firms is largely eliminated Our analysis suggests that
SMEs are more flexible in that they also rely on other sources of finance such as trade credit
and ownersrsquo contributed equity which may make them more flexible than large firms during
the years of crisis Furthermore smaller firms overall require less finance given the small
scale of their projects So they may be hit less by financial contraction compared to larger
firms the financial position of which is particularly undermined in the situation of global crises
when international financial markets dry up thus preventing larger firms from drawing upon
them when required Smaller firms are also more flexible and it is less costly for them to
restructure and downsize when they are hit with external shocks
Our second set of results relate to the firm characteristics Consistent with the literature
firmrsquos export orientation increases the reliance on trade credit and reduces the reliance on
internal funds while foreign ownership diminishes the reliance on bank lending Foreign firms
tend to rely more on retained earnings and intra-company fundsrsquo transfers in the case of
multinational businesses In our empirical study we also find that international product
certification increases the access to private loans and informal funding Our results also
suggest that social capital in the form of connections with officials is used by SMEs to
overcome deficiency of the property rights system and facilitate reinvestment of earnings by
small businesses
Finally our third set of the results is related to the role financial institutional
arrangements play for firm perception of financial constraints and financing decisions With
the development of the financial institutions the transactions costs of financial intermediation
may decrease reducing the cost of finance and increasing its availability Indeed we find that
a higher share of private credit to GDP is associated with firms relying more on private credit
in financing their investment decisions We also show that a size of the formal credit market
plays more prominent role in firmsrsquo perception of financial constraints
Our findings have some policy implications Overall a more developed financial sector
can mitigate market frictions to make bank finance more accessible by SMEs in good times
and to provide some incentives for small businesses to reinvest their earnings This may also
facilitate accumulation of cash by owner-managers which can be used as a cushion in bad
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Rostowski J ed 1995 Banking reform in Central Europe and the Soviet Union Budapest
Central University Press
Rehman Shafiq 2011 The Effect of Financial Crisis on the Behaviour of Trade Credit A
Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
Roodman D 2009 Estimating Fully Observed Recursive Mixed-Process Models with cmp CGD Working Paper 168 Washington DC Center for Global Development Sprenger C 2002 ldquoOwnership and Corporate Governance in Russian Industry a Surveyrdquo
EBRD Working Paper No70
Stijn Claessens and Konstantinos Tzioumis 2006 Measuring firmsrsquo access to finance
World Bank Working Paper
Taketa G and K Udell 2007 Lending Channels and Financial Shocks The Case of Small
and Medium-Sized Enterprise Trade Credit and the Japanese Banking Crisis Monetary and
Economic Studies Institute for Monetary and Economic Studies Bank of Japan 25(2) 1- 44
November
Tornell A and F Westermann 2005 Boom-Bust Cycles and Financial Liberalization
Cambridge MA MIT Press
Verbeek M (2000) A Guide to Modern Econometrics John Wiley amp Sons New York
28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
Challenging Environments Journal of Small Business Management 49(1) 107-125
World Bank (2011) World Development Indicators (edition September 2011) ESDS
International University of Manchester DOI httpdxdoiorg105257wbwdi2011-09
Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
23
times However in the situation of external shocks and financial contraction the authorities
should focus on promoting trade credit that is seen as substitute for bank loans in bad times
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Arnold G 2008 Corporate Financial Management 4th Edition Prentice Hall
Atanasova and Wilson 2003 Bank Borrowing Constraints and the Demand for Trade Credit
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Barth J G Caprio and R Levine 2006 Rethinking Bank Regulation Till Angels Govern
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Beck T A Demirguumlccedil-Kunt L Laeven and V Maksimovic (2006) ldquoThe Determinants of
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Berger A amp G Udell 1998 The Economics of Small Business Finance The Role of
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Delcoure N 2007 The Determinants of Capital Structure in Transitional Economies
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Ge Y and J Qiu 2007 Financial Development Bank Discrimination and Trade Credit
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Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
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Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
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Ravid S and M Spiegel 1997 Optimal Financing Contracts for a Start-up with Unlimited
Operating Discretion Journal of Financial and Quantitative Analysis 32 269-86
Rostowski J ed 1995 Banking reform in Central Europe and the Soviet Union Budapest
Central University Press
Rehman Shafiq 2011 The Effect of Financial Crisis on the Behaviour of Trade Credit A
Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
Roodman D 2009 Estimating Fully Observed Recursive Mixed-Process Models with cmp CGD Working Paper 168 Washington DC Center for Global Development Sprenger C 2002 ldquoOwnership and Corporate Governance in Russian Industry a Surveyrdquo
EBRD Working Paper No70
Stijn Claessens and Konstantinos Tzioumis 2006 Measuring firmsrsquo access to finance
World Bank Working Paper
Taketa G and K Udell 2007 Lending Channels and Financial Shocks The Case of Small
and Medium-Sized Enterprise Trade Credit and the Japanese Banking Crisis Monetary and
Economic Studies Institute for Monetary and Economic Studies Bank of Japan 25(2) 1- 44
November
Tornell A and F Westermann 2005 Boom-Bust Cycles and Financial Liberalization
Cambridge MA MIT Press
Verbeek M (2000) A Guide to Modern Econometrics John Wiley amp Sons New York
28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
Challenging Environments Journal of Small Business Management 49(1) 107-125
World Bank (2011) World Development Indicators (edition September 2011) ESDS
International University of Manchester DOI httpdxdoiorg105257wbwdi2011-09
Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
24
Private Equity and Debt Markets in the Financial Growth Cycle Journal of Banking
and Finance 22 613ndash73
Berglof E and Bolton P 2002 The great divide and beyond financial architecture in
transition Journal of Economic Perspectives 16 (1 Winter) pp 77-100
Bernanke B S amp M Gertler 1995 Inside the Black Box The Credit Channel of Monetary
Policy Transmission NBER Working Papers 5146 National Bureau of Economic Research
Inc
Bernanke B M Gertler amp S Gilchrist 1998 The Financial Accelerator in a Quantitative
Business Cycle Framework in Taylor J amp M Woodford (ed) 1999 Handbook of
Macroeconomics Elsevier 1(1)
Bevan A and J Danbolt 2002 Capital structure and its determinants in the UK - a
decompositional analysis Applied Financial Economics 12(3) 159-170
Bygrave W 2003 Financing Entrepreneurs and their Ventures In P Reynolds W Bygrave
and E Autio eds Global Entrepreneurship Monitor 2003 Global Report Kansas City
Kauffman Center for Entrepreneurial Leadership at the Ewing Mario Kauffman Foundation
Calderon C Didier T 2009 Severity Of The Crisis And Its Transmission Channels World Bank LAC Research Report CantonE I Grilo J Monteagudo and P van der Zwan 2010 Investigating the Perceptions
of Credit Constraints in the European Union Erasmus Research Institute of Management
Report
Chakraborty I 2008 Capital Structure in Emerging Stock Market The Case of India
Research in International Business and Finance doi101016jribaf201002001
Chang C Lee A amp Lee C 2009 Determinants of Capital Structure Choice A Structural
Equation Modeling Approach Quarterly Journal of Economics and Finance 49 197-213
Commander SJ amp J Svejnar 2011 Business Environment Exports Ownership and Firm
Performance Review of Economics and Statistics 931 309-337
Correa PG Fernandes AM amp Uregian C 2010 Technology Adoption and the Investment
Climate Firm-Level Evidence for Eastern Europe and Central Asia The World
Bank Economic Review 24 121-147
Crnigoj M 2007 Risk Averse Insiders with Specific Objective Function and Capital
Structure Mimeo
Cull R and L C Xu 2007 Formal Finance and Trade Credit during Chinarsquos Transition
World Bank Policy Research Working Paper 4204
De La Torre AM Peria and S Schmukler 2008 Bank Involvement with SMEs Beyond
Relationship Lending Working Paper Series 4649 World Bank Washington DC
Delcoure N 2007 The Determinants of Capital Structure in Transitional Economies
25
International Review of Economics and Finance 16 400-415
Didier T Hevia C and Schmukler SL 2011 How Resilient Were Emerging Economies to the Global Crisis World Bank Policy Research Working Paper No 5637
Estrin S and T Mickiewicz 2010 Entrepreneurship in Transition Economies The Role of
Institutions Forthcoming in edited volume by M Minitti at Oxford UP
Estrin S J Korostelva and T Mickiewicz 2011 Which Institutions Encourage Entrepreneurs
to Create Larger Firms IZA Discussion Paper 5481 available from
httpftpizaorgdp5481pdf
Ge Y and J Qiu 2007 Financial Development Bank Discrimination and Trade Credit
Journal of Banking amp Finance 31 513ndash530
Gertler M and S Gilchrist 1993 The Role of Credit Market Imperfections in the Monetary
Transmission Mechanism Arguments and Evidence The Scandinavian Journal of
Economics 95(1) (Mar 1993) 43-64
Girma S Gong Y amp Gorg H 2008 Foreign Direct Investment Access to Finance and
Innovation Activity in Chinese Enterprises The World Bank Economic Review 22 367-382
Glaeser E R La Porta F Lopez-de-Silanes and A Shleifer Do Institutions Cause
Growth NBER Working Paper Series 10568 2004
Gorodnichenko Y and M Schnitzer 2010 Financial constraints and innovation Why poor
countries donrsquot catch up NBER working papers 15792 National Bureau of Economic
Research Inc
Fraser S 2009 Small Firms in the Credit Crisis Evidence from the UK Survey of SME Finances Economic and Social Research Council Report Available at httpwww2warwickacukfacsocwbsresearchcsmeresearchlatestsmall_firms_in_the_credit_crisis_v3-oct09pdf Herbane B 2011 Small business research Time for a crisis-based view International Small
Business Journal 28(1)43ndash64
Huyghebaert N 2001 The Capital Structure of the Business Start-ups Determinants of
Initial Capital Structure Review of Banking and Finance 284-88
Isachenkova N J Korosteleva and Y Rodionova 2011 Financing Choices A Study of
Entrepreneurial Firms in High-tech Industries CSESCE Working Paper No Centre for
the Study of Economic and Social Change in Europe UCL London
Johnson S J McMillan and C Woodruff 2002 Property Rights and Finance The American
Economic Review 92 (5)1335-1356
Klapper L V Sarria-Allende and V Sulla 2002 Small- and Medium-Size Enterprise
Financing in Eastern Europe World Bank Policy Research Working Paper 2933
26
Klapper L F and Randall D 2010 ldquoThe Impact of the Financial Crisis on Supply-Chain
Financingrdquo World Bank Group Enterprise note No 13Korosteleva J and Mickiewicz T
2011 Startup finance in the age of globalisation Emerging Markets Finance and Trade
47(3) 23-49
Korosteleva J and C Lawson (2010) The Belarusian Case of Transition Whither Financial
Repression Post-Communist Economies Vol 22(1)
Levine R 1997 Financial Development and Economic Growth Views and Agenda Journal
of Economic Literature 35 (June) 688-726
Li K Yue H amp Zhao L 2009 Ownership Institutions and Capital Structure Evidence
From China Journal of Comparative Economics 37 471-490
Lizal L and J Svejnar 2002 Investment credit rationing and the soft budget constraint
evidence from Czech panel data Review of Economics and Statistics 84(2) 353-370
Love I 2003 Financial development and financing constraints International evidence from
the structural investment model Review of Financial Studies 16(3) pp 765-79
Love I and R Zaidi 2010 Trade Credit Bank Credit and Financial Crisis International
Review of Finance 10(1) 125-147 March
Mateut S S Bougheas and P Mizen 2006 Trade credit bank lending and monetary
policy transmission European Economic Review 50(3) 603-629
Matthews C H and S G Scott1995 Uncertainty and Planning in Small and
Entrepreneurial Firms An Empirical Assessment Journal of Small Business management
23(4) 34-52
Meltzer A H 1960 Mercantile Credit Monetary Policy and Size of Firms The Review of
Economics and Statistics 42 (4 ) (Nov 1960) 429-437
Mitra P amp Muravyev A amp M Schaffer 2008 Convergence in Institutions and Market
Outcomes Cross-Country and Time-Series Evidence from the BEEPS Surveys in Transition
Economies IZA Discussion Papers 3863 Institute for the Study of Labor (IZA)
Modigliani F and MH Miller 1958 The Cost of Capital Corporation Finance and the
Theory of Investment American Economic Review 48(3) pp 261-97
Nielsen J H 2002 Trade Credit and the Bank Lending Channel Journal of Money Credit
and Banking 34 226-253
Nivorozhkin E 2005 Financing Choices of Firms in EU Accession Countries Emerging
Markets Review 6 138-169
Norton E Wang H and C Ai 2004 Computing Interaction Effects in Logit and Probit
Models The Stata Journal 4(2) 103-116
Petersen M A and R G Rajan 1997 Trade Credit Theory and Evidence Review of
Financial Studies 10 661ndash691
27
Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
No 33
Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
Small- and Medium-sized Businesses in Central and Eastern Europe Journal of Business
Venturing 14 519-539
Pissarides F 2001 Financial Structure to Promote Private Sector Development in South-
Eastern Europe EBRD Working Paper No 64
Pissarides F M Singer and J Svejnar 2003 Objectives and Constraints of Entrepreneurs
Evidence from Small and Medium Size Enterprises in Russia and Bulgaria Journal of
Comparative Economics 31 503-531
Radygin A D A E Gontmakher M G Kuzyk I V Mezheraup H Swain Yu V
Simachiov N A Shmeleva and R M Entov 2005 The institution of Bankruptcy
Development Problems Areas of Reforming Consortium for Economic Policy Research and
Advice Moscow 2005
Ravid S and M Spiegel 1997 Optimal Financing Contracts for a Start-up with Unlimited
Operating Discretion Journal of Financial and Quantitative Analysis 32 269-86
Rostowski J ed 1995 Banking reform in Central Europe and the Soviet Union Budapest
Central University Press
Rehman Shafiq 2011 The Effect of Financial Crisis on the Behaviour of Trade Credit A
Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
Roodman D 2009 Estimating Fully Observed Recursive Mixed-Process Models with cmp CGD Working Paper 168 Washington DC Center for Global Development Sprenger C 2002 ldquoOwnership and Corporate Governance in Russian Industry a Surveyrdquo
EBRD Working Paper No70
Stijn Claessens and Konstantinos Tzioumis 2006 Measuring firmsrsquo access to finance
World Bank Working Paper
Taketa G and K Udell 2007 Lending Channels and Financial Shocks The Case of Small
and Medium-Sized Enterprise Trade Credit and the Japanese Banking Crisis Monetary and
Economic Studies Institute for Monetary and Economic Studies Bank of Japan 25(2) 1- 44
November
Tornell A and F Westermann 2005 Boom-Bust Cycles and Financial Liberalization
Cambridge MA MIT Press
Verbeek M (2000) A Guide to Modern Econometrics John Wiley amp Sons New York
28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
Challenging Environments Journal of Small Business Management 49(1) 107-125
World Bank (2011) World Development Indicators (edition September 2011) ESDS
International University of Manchester DOI httpdxdoiorg105257wbwdi2011-09
Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
25
International Review of Economics and Finance 16 400-415
Didier T Hevia C and Schmukler SL 2011 How Resilient Were Emerging Economies to the Global Crisis World Bank Policy Research Working Paper No 5637
Estrin S and T Mickiewicz 2010 Entrepreneurship in Transition Economies The Role of
Institutions Forthcoming in edited volume by M Minitti at Oxford UP
Estrin S J Korostelva and T Mickiewicz 2011 Which Institutions Encourage Entrepreneurs
to Create Larger Firms IZA Discussion Paper 5481 available from
httpftpizaorgdp5481pdf
Ge Y and J Qiu 2007 Financial Development Bank Discrimination and Trade Credit
Journal of Banking amp Finance 31 513ndash530
Gertler M and S Gilchrist 1993 The Role of Credit Market Imperfections in the Monetary
Transmission Mechanism Arguments and Evidence The Scandinavian Journal of
Economics 95(1) (Mar 1993) 43-64
Girma S Gong Y amp Gorg H 2008 Foreign Direct Investment Access to Finance and
Innovation Activity in Chinese Enterprises The World Bank Economic Review 22 367-382
Glaeser E R La Porta F Lopez-de-Silanes and A Shleifer Do Institutions Cause
Growth NBER Working Paper Series 10568 2004
Gorodnichenko Y and M Schnitzer 2010 Financial constraints and innovation Why poor
countries donrsquot catch up NBER working papers 15792 National Bureau of Economic
Research Inc
Fraser S 2009 Small Firms in the Credit Crisis Evidence from the UK Survey of SME Finances Economic and Social Research Council Report Available at httpwww2warwickacukfacsocwbsresearchcsmeresearchlatestsmall_firms_in_the_credit_crisis_v3-oct09pdf Herbane B 2011 Small business research Time for a crisis-based view International Small
Business Journal 28(1)43ndash64
Huyghebaert N 2001 The Capital Structure of the Business Start-ups Determinants of
Initial Capital Structure Review of Banking and Finance 284-88
Isachenkova N J Korosteleva and Y Rodionova 2011 Financing Choices A Study of
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the Study of Economic and Social Change in Europe UCL London
Johnson S J McMillan and C Woodruff 2002 Property Rights and Finance The American
Economic Review 92 (5)1335-1356
Klapper L V Sarria-Allende and V Sulla 2002 Small- and Medium-Size Enterprise
Financing in Eastern Europe World Bank Policy Research Working Paper 2933
26
Klapper L F and Randall D 2010 ldquoThe Impact of the Financial Crisis on Supply-Chain
Financingrdquo World Bank Group Enterprise note No 13Korosteleva J and Mickiewicz T
2011 Startup finance in the age of globalisation Emerging Markets Finance and Trade
47(3) 23-49
Korosteleva J and C Lawson (2010) The Belarusian Case of Transition Whither Financial
Repression Post-Communist Economies Vol 22(1)
Levine R 1997 Financial Development and Economic Growth Views and Agenda Journal
of Economic Literature 35 (June) 688-726
Li K Yue H amp Zhao L 2009 Ownership Institutions and Capital Structure Evidence
From China Journal of Comparative Economics 37 471-490
Lizal L and J Svejnar 2002 Investment credit rationing and the soft budget constraint
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Love I 2003 Financial development and financing constraints International evidence from
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Matthews C H and S G Scott1995 Uncertainty and Planning in Small and
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Meltzer A H 1960 Mercantile Credit Monetary Policy and Size of Firms The Review of
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Mitra P amp Muravyev A amp M Schaffer 2008 Convergence in Institutions and Market
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and Banking 34 226-253
Nivorozhkin E 2005 Financing Choices of Firms in EU Accession Countries Emerging
Markets Review 6 138-169
Norton E Wang H and C Ai 2004 Computing Interaction Effects in Logit and Probit
Models The Stata Journal 4(2) 103-116
Petersen M A and R G Rajan 1997 Trade Credit Theory and Evidence Review of
Financial Studies 10 661ndash691
27
Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
No 33
Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
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Venturing 14 519-539
Pissarides F 2001 Financial Structure to Promote Private Sector Development in South-
Eastern Europe EBRD Working Paper No 64
Pissarides F M Singer and J Svejnar 2003 Objectives and Constraints of Entrepreneurs
Evidence from Small and Medium Size Enterprises in Russia and Bulgaria Journal of
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Radygin A D A E Gontmakher M G Kuzyk I V Mezheraup H Swain Yu V
Simachiov N A Shmeleva and R M Entov 2005 The institution of Bankruptcy
Development Problems Areas of Reforming Consortium for Economic Policy Research and
Advice Moscow 2005
Ravid S and M Spiegel 1997 Optimal Financing Contracts for a Start-up with Unlimited
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Central University Press
Rehman Shafiq 2011 The Effect of Financial Crisis on the Behaviour of Trade Credit A
Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
Roodman D 2009 Estimating Fully Observed Recursive Mixed-Process Models with cmp CGD Working Paper 168 Washington DC Center for Global Development Sprenger C 2002 ldquoOwnership and Corporate Governance in Russian Industry a Surveyrdquo
EBRD Working Paper No70
Stijn Claessens and Konstantinos Tzioumis 2006 Measuring firmsrsquo access to finance
World Bank Working Paper
Taketa G and K Udell 2007 Lending Channels and Financial Shocks The Case of Small
and Medium-Sized Enterprise Trade Credit and the Japanese Banking Crisis Monetary and
Economic Studies Institute for Monetary and Economic Studies Bank of Japan 25(2) 1- 44
November
Tornell A and F Westermann 2005 Boom-Bust Cycles and Financial Liberalization
Cambridge MA MIT Press
Verbeek M (2000) A Guide to Modern Econometrics John Wiley amp Sons New York
28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
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World Bank (2011) World Development Indicators (edition September 2011) ESDS
International University of Manchester DOI httpdxdoiorg105257wbwdi2011-09
Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
26
Klapper L F and Randall D 2010 ldquoThe Impact of the Financial Crisis on Supply-Chain
Financingrdquo World Bank Group Enterprise note No 13Korosteleva J and Mickiewicz T
2011 Startup finance in the age of globalisation Emerging Markets Finance and Trade
47(3) 23-49
Korosteleva J and C Lawson (2010) The Belarusian Case of Transition Whither Financial
Repression Post-Communist Economies Vol 22(1)
Levine R 1997 Financial Development and Economic Growth Views and Agenda Journal
of Economic Literature 35 (June) 688-726
Li K Yue H amp Zhao L 2009 Ownership Institutions and Capital Structure Evidence
From China Journal of Comparative Economics 37 471-490
Lizal L and J Svejnar 2002 Investment credit rationing and the soft budget constraint
evidence from Czech panel data Review of Economics and Statistics 84(2) 353-370
Love I 2003 Financial development and financing constraints International evidence from
the structural investment model Review of Financial Studies 16(3) pp 765-79
Love I and R Zaidi 2010 Trade Credit Bank Credit and Financial Crisis International
Review of Finance 10(1) 125-147 March
Mateut S S Bougheas and P Mizen 2006 Trade credit bank lending and monetary
policy transmission European Economic Review 50(3) 603-629
Matthews C H and S G Scott1995 Uncertainty and Planning in Small and
Entrepreneurial Firms An Empirical Assessment Journal of Small Business management
23(4) 34-52
Meltzer A H 1960 Mercantile Credit Monetary Policy and Size of Firms The Review of
Economics and Statistics 42 (4 ) (Nov 1960) 429-437
Mitra P amp Muravyev A amp M Schaffer 2008 Convergence in Institutions and Market
Outcomes Cross-Country and Time-Series Evidence from the BEEPS Surveys in Transition
Economies IZA Discussion Papers 3863 Institute for the Study of Labor (IZA)
Modigliani F and MH Miller 1958 The Cost of Capital Corporation Finance and the
Theory of Investment American Economic Review 48(3) pp 261-97
Nielsen J H 2002 Trade Credit and the Bank Lending Channel Journal of Money Credit
and Banking 34 226-253
Nivorozhkin E 2005 Financing Choices of Firms in EU Accession Countries Emerging
Markets Review 6 138-169
Norton E Wang H and C Ai 2004 Computing Interaction Effects in Logit and Probit
Models The Stata Journal 4(2) 103-116
Petersen M A and R G Rajan 1997 Trade Credit Theory and Evidence Review of
Financial Studies 10 661ndash691
27
Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
No 33
Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
Small- and Medium-sized Businesses in Central and Eastern Europe Journal of Business
Venturing 14 519-539
Pissarides F 2001 Financial Structure to Promote Private Sector Development in South-
Eastern Europe EBRD Working Paper No 64
Pissarides F M Singer and J Svejnar 2003 Objectives and Constraints of Entrepreneurs
Evidence from Small and Medium Size Enterprises in Russia and Bulgaria Journal of
Comparative Economics 31 503-531
Radygin A D A E Gontmakher M G Kuzyk I V Mezheraup H Swain Yu V
Simachiov N A Shmeleva and R M Entov 2005 The institution of Bankruptcy
Development Problems Areas of Reforming Consortium for Economic Policy Research and
Advice Moscow 2005
Ravid S and M Spiegel 1997 Optimal Financing Contracts for a Start-up with Unlimited
Operating Discretion Journal of Financial and Quantitative Analysis 32 269-86
Rostowski J ed 1995 Banking reform in Central Europe and the Soviet Union Budapest
Central University Press
Rehman Shafiq 2011 The Effect of Financial Crisis on the Behaviour of Trade Credit A
Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
Roodman D 2009 Estimating Fully Observed Recursive Mixed-Process Models with cmp CGD Working Paper 168 Washington DC Center for Global Development Sprenger C 2002 ldquoOwnership and Corporate Governance in Russian Industry a Surveyrdquo
EBRD Working Paper No70
Stijn Claessens and Konstantinos Tzioumis 2006 Measuring firmsrsquo access to finance
World Bank Working Paper
Taketa G and K Udell 2007 Lending Channels and Financial Shocks The Case of Small
and Medium-Sized Enterprise Trade Credit and the Japanese Banking Crisis Monetary and
Economic Studies Institute for Monetary and Economic Studies Bank of Japan 25(2) 1- 44
November
Tornell A and F Westermann 2005 Boom-Bust Cycles and Financial Liberalization
Cambridge MA MIT Press
Verbeek M (2000) A Guide to Modern Econometrics John Wiley amp Sons New York
28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
Challenging Environments Journal of Small Business Management 49(1) 107-125
World Bank (2011) World Development Indicators (edition September 2011) ESDS
International University of Manchester DOI httpdxdoiorg105257wbwdi2011-09
Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
27
Pissarides F 1998 Is Lack of Funds the Main Obstacle to Growth EBRD Working Paper
No 33
Pissarides F 1999 Is Lack of Funds the Main Obstacle to Growth EBRDrsquos Experience with
Small- and Medium-sized Businesses in Central and Eastern Europe Journal of Business
Venturing 14 519-539
Pissarides F 2001 Financial Structure to Promote Private Sector Development in South-
Eastern Europe EBRD Working Paper No 64
Pissarides F M Singer and J Svejnar 2003 Objectives and Constraints of Entrepreneurs
Evidence from Small and Medium Size Enterprises in Russia and Bulgaria Journal of
Comparative Economics 31 503-531
Radygin A D A E Gontmakher M G Kuzyk I V Mezheraup H Swain Yu V
Simachiov N A Shmeleva and R M Entov 2005 The institution of Bankruptcy
Development Problems Areas of Reforming Consortium for Economic Policy Research and
Advice Moscow 2005
Ravid S and M Spiegel 1997 Optimal Financing Contracts for a Start-up with Unlimited
Operating Discretion Journal of Financial and Quantitative Analysis 32 269-86
Rostowski J ed 1995 Banking reform in Central Europe and the Soviet Union Budapest
Central University Press
Rehman Shafiq 2011 The Effect of Financial Crisis on the Behaviour of Trade Credit A
Study of the UK Private Firms BAFA Northern Area Group Annual Conference 6th
Septmeber 2011
Roodman D 2009 Estimating Fully Observed Recursive Mixed-Process Models with cmp CGD Working Paper 168 Washington DC Center for Global Development Sprenger C 2002 ldquoOwnership and Corporate Governance in Russian Industry a Surveyrdquo
EBRD Working Paper No70
Stijn Claessens and Konstantinos Tzioumis 2006 Measuring firmsrsquo access to finance
World Bank Working Paper
Taketa G and K Udell 2007 Lending Channels and Financial Shocks The Case of Small
and Medium-Sized Enterprise Trade Credit and the Japanese Banking Crisis Monetary and
Economic Studies Institute for Monetary and Economic Studies Bank of Japan 25(2) 1- 44
November
Tornell A and F Westermann 2005 Boom-Bust Cycles and Financial Liberalization
Cambridge MA MIT Press
Verbeek M (2000) A Guide to Modern Econometrics John Wiley amp Sons New York
28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
Challenging Environments Journal of Small Business Management 49(1) 107-125
World Bank (2011) World Development Indicators (edition September 2011) ESDS
International University of Manchester DOI httpdxdoiorg105257wbwdi2011-09
Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
28
Welter F and D Smallbone 2011 Institutional Perspective on Entrepreneurial Behaviour in
Challenging Environments Journal of Small Business Management 49(1) 107-125
World Bank (2011) World Development Indicators (edition September 2011) ESDS
International University of Manchester DOI httpdxdoiorg105257wbwdi2011-09
Zellner A 1962 An efficient method of estimating seemingly unrelated regression equations
and tests for aggregation bias Journal of the American Statistical Association 57 348ndash368
Zou H and Adams 2008 Debt Capacity Cost of Debt and Corporate Insurance Journal of
Financial and Quantitative Analysis 43 433-466
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
29
Figure 1 Domestic Credit to Private Sector (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
Source World Bank (2011) Figure 2 Market Capitalisation (as of GDP) in Transition Economies and
Comparator Countries selectively 1991-2010
000
5000
10000
15000
20000
25000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary Kazakhstan
Lithuania Poland Russian Federation Slovenia United States
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
30
Source World Bank (2011) Source World Bank (2011)
000
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1991 1993 1995 1998 2001 2004 2007 2008 2009 2010
China Czech Rep Estonia Germany Hungary KazakhstanLithuania Poland Russian Federation Slovenia United States
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
Figure 3 Percentage of SMEsobstacle in operating business 2002
Source Authorsrsquo calculations based on BEEPS 2002access to of finance (incl its availability and cost) is No ObstaModerate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firmemployment criterion in accordance with Eurostat criteria micro firm sized - 10-49 employees mediumand over SMEs are respectively def
Percentage of SMEs vs Large firms that perceive access to finance as a major obstacle in operating business 2002-2009
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked whether access to of finance (incl its availability and cost) is No Obstacle a Minor Obstacle a Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a major and very severe obstacle Please note firms were classified by size on the basis of employment criterion in accordance with Eurostat criteria micro firm -
49 employees medium-sized - 50- 249 employees and large and over SMEs are respectively defined as employing less than 250 employees
31
vs Large firms that perceive access to finance as a major
09 Respondents were asked whether cle a Minor Obstacle a
Moderate Obstacle a Major Obstacle a Very Severe Obstacle to the current operations of their firms The figure shows only percentage of firms which find access to finance as both a
s were classified by size on the basis of - 0-9 employees small-
249 employees and large - 250 employees ined as employing less than 250 employees
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
Figure 4 Sources of financing SMEsrsquo investments
Source Authorsrsquo calculations based on BEEPS 2002-09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets thathe previous year from each of the sources listed on the diagram
32
09 Respondents were asked to estimate the proportion of their firmsrsquo total purchase of fixed assets that was financed over
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
33
Table 1 Descriptive statistics and definitions of variables
Variable Definition Mean SD No of obs EXPLANATORY variables Institutional variables and macroeconomic controls Property rights (t-1)
Polity IV lsquoExecutive Constraintsrsquo scores from 1=rdquounlimited authorityrdquo to 7=rdquoexecutive parityrdquo higher value denotes less arbitrariness
572 175 21867
Domestic credit as a of GDP (t-1)
Ratio of credit to private sector to GDP (WB WDI April 2009)
3211 1878 21477
GDP per capita (t-1)
GDP per capita at purchasing power parity constant at 2005 $USD (WB WDI April 2009)
99472 543073 21867
GDP growth (t-1)
Annual GDP growth rate (WB WDI April 2009) 629 324 21867
Firm and industry-level characteristics Small amp medium-sized firms
1=small firms with a number of employees being gt=1 and lt250 0 otherwise
893 309 21835
Crisis 1=2008 amp 2009 0 otherwise 26 44 21867 Age Age of firm in 2008 or in 2009 years 2084 10268 21859 Age squared Age squared - - 21859 International product certification
1=firm in a process of applying or it has an international product certificate 0 otherwise
35 76 21766
Foreign ownership Percent owned by foreign individuals companies or organisations
982 2746 21469
Export orientation Percent of sales exported directly or indirectly 1137 2577 21828 Privately owned from inception
1=firm is private from inception 75 43 18767
Time spent on dealing with government regulations
Percent of time spent on dealing with government regulations
843 1348 20701
Pressure to innovate originates from domestic competition
1=Yes 0 otherwise 283 103 20186
Pressure to innovate originates from foreign competition
1=Yes 0 otherwise 208 114 19707
Pressure to innovate originates from customers
1=Yes 0 otherwise 29 104 20093
DEPENDENT variables Probit model Perception of financial constraints
1=firm perceives financial constraints as major or very severe 0 otherwise
22 42 20934
SURE tobit model Retained profits Retained profits as a of firm financing of fixed
assets 6692 4039 14491
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
34
Private loan Private loan as a of firm financing of fixed assets
1268 2763 13246
Trade credit Trade credit as a of firm financing of fixed assets
367 1483 14267
Privatecontributed equity
Privatecontributed equity as a of firm financing of fixed assets
415 1768 14257
Informal funding Money from family friends and other money lenders as a of firm financing of fixed assets
998 2551 13279
Source BEEPS 2002-2009 unless specified otherwise
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
35
Table 2 Correlation Matrix for the dependent and macro-level variables
Variables
Percep
of
financial
const-s
Retaine
d profits
Private
loan
Inform
al
finance
Trade
credit
Private
equity
SME
Crisis
Property
rights
Dom
estic
credit
GDP pc
ppp
GDP
grow
th
Perception
of financial
constraints
1
Retained
profits
-008
1
Private loan
003
-053
1
Inform
al
finance
004
-047
-012
1
Trade credit
003
-029
-004
-005
1
Private
equity
003
-033
-006
-007
-003
1
SME
003
005
-006
-001
-002
002
1
Crisis
009
-012
015
-016
012
011
002
1
Property
rights (t-1)
000
-013
010
005
-002
004
001
-005
1
Dom
estic
credit (t-1)
0002
-016
017
-008
006
009
001
052
043
1
GDP pc ppp
(t-1)
-002
-013
006
0002
002
004
-001
19
046
064
1
GDP growth
(t-1)
-001
011
-008
-0001
-002
-001
001
-017
044
-050
-055
1
Source BEEPS 2002-2009 W
B W
DI A
pr 2009 Polity IV
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
36
Table 3 Perception of Financial Constraints probit estimation results and marginal effects Dependent variable Perception of financial constraints as a major obstacle
probit results probit marginal effects
Coef Robust Std Err
Coef Robust Std Err
Small and Medium-sized enterprises 0203 0058 0052 0014 Crisis 0890 0126 0301 0047 Small and Medium-sized_x_Crisis -0273 0113 -0069 0026 International Product Certification -0057 0020 -0016 0005 Privately owned from inception 0012 0036 0003 0010 Time spent on dealing with government regulations 0005 0001 0001 00003 Pressure to innovate originates from domestic competition 0071 0015 0020 0004 Pressure to innovate originates from foreign competition 0078 0016 0022 0004 Pressure to innovate originates from customers 0048 0013 0013 0004 Foreign Ownership -0005 0001 -0001 00001 Export orientation -00001 0001 -0000018 00002 Age -0001 0001 -00002853 00003 Age squared x 10-07 497 525 137 145 Domestic Credit as of GDP (t-1) -0009 0003 -0003 0001 Property Rights (t-1) 0028 0058 0008 0016 GDP growth (t-1) -0023 0008 -0006 0002 Outsourced product 0024 0043 0007 0012 GDP per capita ppp (t-1) Quartile1 0257 0210 0075 0065 GDP per capita ppp (t-1) Quartile 2 0338 0160 0100 0050 GDP per capita ppp (t-1) Quartile 3 0091 0123 0026 0036 GDP per capita ppp (t-1) Quartile 4 0180 0079 0052 0023 Constant -2094 433 na na Industrial controls Yes Yes Yes Yes Country controls Yes Yes Yes Yes Number of obs 12807 12807 Pseudo R2 00673 00673 Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of SME and crisis the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at mean is equal to -0074 standard error is equal to 0038 and z statistic is equal to -190 indicating significance at 001 level
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
37
Table 4 SURE Tobits results for Firmsrsquo Financing Choices (based on whole sample)
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -1468 14429 -34767 4368 73231 (348) (6410) (7329) (9464) (11454)
SME 430 -13399 -1525 -3524 -4729 (1879) (3438) (3489) (5247) (7219) International Product Certification -0697 4192 4165 1884 -0852
(0720) (1306) (1311) (2107) (2728) Privately owned from inception 0866 2911 5778 -8569 -4307
(1276) (2541) (2486) (3825) (4811) Time spent on dealing with government regulations -0133 -0018 0323 0246 0346 (0042) (0081) (0076) (0112) (0134) Pressure to innovate originates from domestic competition -128 3166 3024 2552 -2404
(0522) (1052) (1029) (1644) (199) Pressure to innovate originates from foreign competition -0499 0746 2258 0056 845 (0463) (114) (1131) (1745) (2195) Pressure to innovate originates from customers -952 2428 138 2339 3297
(0581) (0915) (0864) (141) (1762) Foreign Ownership 0050 -0094 -0045 -0013 -0003
(0017) (0033) (0032) (0050) (0064) Export orientation -0072 0118 0026 0153 -0035
(0022) (004) (004) (0063) (0080) Age 0042 -0039 -0127 -005 -028
(0037) (007) (0074) (0109) (0149)
Age squared x 10-04 -0204 0246 0453 213 143
(0189) (035) (0367) (539) (070) Domestic credit as of GDP (t-1) 0445 0516 -0976 -0840 -1578 (0120) (0230) (0227) (0349) (0457) Property Rights (t-1) -818 7486 -6239 -741 -22129
(244) (5232) (5211) (7244) (10025) GDP growth (t-1) 0149 1198 -0923 -0623 2098
(0335) (0615) (0669) (906) (119)
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
38
Table 4 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
Outsourced product -7147 7026 11302 9187 11968 (1169) (3037) (3019) (4686) (568)
GDP per capita ppp (t-1) Quartile1 17667 -18847 22746 -38628 -47309
(8296) (16383) (16249) (24715) (32176) GDP per capita ppp (t-1) Quartile2 10075 -1298 -6898 -32957 -36702
(6165) (12290) (11932) (18809) (24136) GDP per capita ppp (t-1) Quartile3 8281 -4884 -6021 -9496 -32234
(4419) (8778) (8145) (13732) (18344) GDP per capita ppp (t-1) Quartile4 1199 -4721 -1553 -12905 6665
(2956) (5524) (4898) (9622) (8691) Inverse Millrsquos Ratio -2526 -32549 19162 -1537 2926
(7875) (14726) (17288) (20594) (2637) Constant 7042 -85070 -64477 -77818 -3173
(1783) (38276) (37321) (5456) (75304) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 9005 9005 9005 9005 9005 Wald Chi-sq (52) 78042 78042 78042 78042 78042 Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
39
Table 5 SURE Tobits results for Financing Choices of Small and Medium-sized Firms
Dependent variable Retained profits
Private Loan
Informal Finance
Trade Credit
Private Equity
Explanatory variables Coef Coef Coef Coef Coef
Crisis -15875 11558 -30270 50053 72067 (3854) (7397) (8228) (10934) (12854)
International Product Certification -0897 3652 3306 2970 -0394
(0826) (1596) (1544) (2534) (3324) Privately owned from inception 0678 2027 4834 -8865 -9052
(1383) (2861) (2731) (4364) (5115) Time spent on dealing with government regulations -0144 -0041 0308 0263 0315 (0045) (0091) (0083) (0125) (0152) Pressure to innovate originates from domestic competition -1294 3967 2409 2881 -2953
(0556) (1162) (1099) (1808) (2122) Pressure to innovate originates from foreign competition -0948 -0675 1751 0208 1492 (0623) (1257) (1219) (1934) (2367) Pressure to innovate originates from customers 0003 2036 0963 1832 2653
(0491) (0998) (0911) (1548) (1893) Foreign Ownership 0049 -0115 -0065 -0012 -0012
(0019) (0039) (0037) (0059) (0076) Export orientation -0071 0136 0035 0159 -0003
(0024) (0046) (0043) (0073) (0090) Age 0029 0012 -0145 0032 -0389
(0047) (0093) (0097) (0149) (0200)
Age squared x 10-04 -02 01 06 -10 20
(02) (05) (05) (10) (10) Domestic credit as of GDP (t-1) 0476 0728 -0946 -0776 -1807 (0134) (0271) (0253) (0399) (0518) Property Rights (t-1) -2254 6503 -10385 4784 -15872
(2647) (5838) (5694) (8174) (10977) GDP growth (t-1) 0207 1151 -0849 -0168 1528
(0376) (0721) (0753) (1057) (1366) Outsourced product -7865 7619 10726 9504 11758
(1832) (3442) (3341) (5316) (6493) GDP per capita ppp (t-1) Quartile1 20894 -32368 20890 -35076 -39491
(8815) (18206) (17397) (27311) (34101)
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
40
Table 5 Continued
Retained Earnings
Private Loan
Informal Finance
Trade Credit
Private Equity
GDP per capita ppp (t-1) Quartile2 13296 -10201 -6731 -28589 -34508
(6551) (13612) (12684) (20675) (25398) GDP per capita ppp (t-1) Quartile3 10309 -10280 -5077 -8055 -29137
(4696) (9796) (8705) (15030) (19279) GDP per capita ppp (t-1) Quartile4 2053 -6537 -2848 -16115 11719
(3151) (6156) (5304) (10614) (9173) Inverse Millrsquos Ratio -1450 -45525 5380 -18916 42778
(9105) (18097) (20333) (24781) (32181) Constant 77698 -77491 -29969 -115744 -58162
(19289) (42941) (41124) (61743) (80918) Industrial controls Yes Yes Yes Yes Yes
Country controls Yes Yes Yes Yes Yes
Number of obs 8072 8072 8072 8072 8072
Wald Chi-sq (51) 71481 71481 71481 71481 71481
Prob gt Chi-sq 00000 00000 00000 00000 00000
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note Significance levels - 1 - 5 - 10
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-
41
Table 6 The Impact of Use of Trade Credit for Real Investmentplusmn on Perceptions of Financial Constraints probit marginal effects
Dependent variable Perception of financial constraints as a major obstacle
probit marginal effects Coef Robust Std
Err
Small and Medium-sized enterprises 00548 00143 Crisis 02149 00338 Use of Trade Credit for Real Investment 00025 00008 Small and Medium-sized_x_Use of Trade Credit for Real Investment -00024 00009 International Product Certification -00077 00062 Privately owned from inception 00134 00118 Time spent on dealing with government regulations 00012 00003
Pressure to innovate originates from domestic competition 00221 00051
Pressure to innovate originates from foreign competition 00109 00042
Pressure to innovate originates from customers 00205 00053 Foreign Ownership -00010 00002 Export orientation -00001 00002 Age -00005 00003 Age squared x 10-07 00000002 00000002
Domestic Credit as of GDP (t-1) -00023 00009 Property Rights (t-1) -00145 00208 GDP growth (t-1) -00081 00025 Outsourced product 00071 00138 GDP per capita ppp (t-1) Quartile1 00399 00758 GDP per capita ppp (t-1) Quartile 2 00679 00602 GDP per capita ppp (t-1) Quartile 3 00131 00413 GDP per capita ppp (t-1) Quartile 4 00457 00263 Constant na na Industrial controls Yes Yes
Country controls Yes Yes
Number of obs 8760
Pseudo R2 00684
Source BEEPS 2002-2009 WB WDI Apr 2009 Polity IV Note significance levels - 1 - 5 - 10 For the interaction term of the SME dummy and Use of Trade Credit for Real Investment the marginal effect is different from the one reported in the table above After controlling for non-linearity following Norton et al 2004 the coefficient of the interaction term at the mean is equal to -0001975 standard error is equal to 0000782 and z statistic is equal to -24852 indicating significance at the 001 level
plusmn The Use of Trade Credit variable is given by the relative percentage of purchases of fixed assets on credit from suppliers and advances from customers
- Introduction
- 2 The stylised facts about SME financing in Transition Economies
-