Innovation and borrower discouragement in SMEs

In this paper, we investigate whether innovative small- and medium-sized enterprises (SMEs) are more likely to be discouraged from applying for external finance than non-innovators. These so-called discouraged borrowers are credit worthy SMEs who choose not to apply for external finance despite the fact that this is needed. We find that SMEs undertaking pure product and joint product and process innovation have a significantly higher incidence of borrower discouragement than non-innovative counterparts. Moreover, radical and incremental product innovators are more likely to be discouraged relative to non-innovative counterparts. Innovative activity can increase borrower discouragement for a myriad of reasons including fear of rejection, reluctance to take on additional risk, negative perceptions of the funding application process and perceived negative economic conditions. Overall, our results suggest a need for targeted policy interventions in order to alleviate borrower discouragement within innovative SMEs, as well as a closer alignment between innovation and SME finance policy.

Corruption News and Corporate Investment: Evidence from China

We examine whether corporate corruption scrutiny affects corporate investment in China. A corruption news index (CNI) containing firm-specific measures of corruption scrutiny was developed by tracking all articles in the press about corruption for all firms trading on the Shanghai and Shenzhen stock exchanges between 2000 and 2016. We found that a standard deviation increase in CNI is associated with a modest and short-lived decline in investment, ranging from 2 to 10 percent, with a stronger effect among SOEs. We explore two channels that can explain the CNI-investment effect: (i) a shift in the cost of external finance and (ii) a rise in political uncertainty connected with corporate corruption scrutiny. Our results indicate that CNI lowers the cost of external finance, pointing to a beneficial aspect of corruption cleanup. However, the effect of CNI on investment is amplified in the presence of provincial political turnover, providing support for the political uncertainty channel. The results also indicate that the negative effect of CNI on investment has significantly declined since 2013, supporting the proposition that the long-term benefits of corruption cleanup outweigh the short-term costs associated with policy uncertainty.

Essays on Foreign Direct Investment and Development Economics

<p>This thesis consists of three empirical essays on Foreign Direct Investment (FDI) and Small Medium Enterprise (SME) access to finance. The first essay examines determinants of Chinese Outward Direct Investment (ODI) in infrastructure sectors. This study focuses on the role of host country institutions, macroeconomic stability and geography on attracting Chinese ODI. Utilizing micro-level project data over the years 2005 to 2016, results show that Chinese infrastructure investments are attracted to countries with a limited fiscal space but strong institutions. We also find that geographic distance, cultural proximity, Free Trade Agreement with China, country size are important factors in attracting Chinese investments. The second essay studies SME access to finance in Asia. We investigate the relative importance of external finance vis-à-vis internal finance for SME and larger firms and examine how SME characteristics associated with the extent of their bank borrowing. Results indicate that bank borrowing and line of credit availability are positively associated with financial audit, managerial experience, export participation, and ISO certificate, while it is negatively associated with foreign ownership and SME status. Our research suggests that access to finance is an important concern in Asia and government intervention targeting improvement in credit guarantee systems, monitoring and credit scoring can help easing the constraints for SME access to external finance. Finally, the third essay examines the role of infrastructure investment deals as a signaling on attracting FDI. Intriguingly, we find that infrastructure deals produce a negative signal to MNEs’ decision making for developing countries. We look for several channels in which the negative signaling effect can pass through. Findings suggest that increase in global risk aversion stemming from global financial crisis and country specific risk level are the main factors behind the negative signalling effect.</p>

Essays on Foreign Direct Investment and Development Economics

<p>This thesis consists of three empirical essays on Foreign Direct Investment (FDI) and Small Medium Enterprise (SME) access to finance. The first essay examines determinants of Chinese Outward Direct Investment (ODI) in infrastructure sectors. This study focuses on the role of host country institutions, macroeconomic stability and geography on attracting Chinese ODI. Utilizing micro-level project data over the years 2005 to 2016, results show that Chinese infrastructure investments are attracted to countries with a limited fiscal space but strong institutions. We also find that geographic distance, cultural proximity, Free Trade Agreement with China, country size are important factors in attracting Chinese investments. The second essay studies SME access to finance in Asia. We investigate the relative importance of external finance vis-à-vis internal finance for SME and larger firms and examine how SME characteristics associated with the extent of their bank borrowing. Results indicate that bank borrowing and line of credit availability are positively associated with financial audit, managerial experience, export participation, and ISO certificate, while it is negatively associated with foreign ownership and SME status. Our research suggests that access to finance is an important concern in Asia and government intervention targeting improvement in credit guarantee systems, monitoring and credit scoring can help easing the constraints for SME access to external finance. Finally, the third essay examines the role of infrastructure investment deals as a signaling on attracting FDI. Intriguingly, we find that infrastructure deals produce a negative signal to MNEs’ decision making for developing countries. We look for several channels in which the negative signaling effect can pass through. Findings suggest that increase in global risk aversion stemming from global financial crisis and country specific risk level are the main factors behind the negative signalling effect.</p>

Balance Sheet Channel of Monetary Policy: Evidence from Credit Spreads of Russian Firms

In this paper, I analyse the relationship between the credit spreads of Russian bond issuers and monetary policy shocks. According to the theory of demand-side financial imperfections, in the presence of financial frictions, the higher the net worth of a firm, the lower its external finance premium. The theory of the balance sheet channel of monetary policy suggests that monetary shocks may affect the net worth of a firm through debt outflows. Together, these ideas predict that the external finance premium of more indebted companies is more sensitive to monetary policy shocks. However, my empirical findings from the credit spreads of Russian companies do not support this theory.

Banking on the Confucian Clan: Why China Developed Financial Markets So Late

Over the past millennium, China has relied on the Confucian clan to achieve interpersonal cooperation, focusing on kinship and neglecting the development of impersonal institutions needed for external finance. In this paper, we test the hypothesis that the Confucian clan and financial markets are competing substitutes. Using the large cross-regional variation in the adoption of modern banks, we find that regions with historically stronger Confucian clans established significantly fewer modern banks in the four decades following the founding of China's first modern bank in 1897. Our evidence also shows that the clan continues to limit China's financial development today.

CREDIT QUALITY AND SUBSTITUTION IN SME FINANCE

We investigate whether and how SMEs’ credit quality influences their substitution of bank credit for trade credit. Using data from the five largest European countries, we find that substitution of bank credit for trade credit decreases during the financial crisis, but it decreases significantly less for ex ante low credit quality firms. We control for pre-crisis or lagged firm characteristics including size and external finance dependence, industry effects, sample selection effects and cross-country heterogeneity. We also find that low credit quality firms increase their absolute and relative trade credit usage significantly more than high credit quality firms during the financial crisis. The effects are consistent across countries and stronger for net trade credit borrowers and financially constrained firms. The evidence highlights how credit quality influences demand-side driven substitution in SME finance.

COMMERCIAL-LAW REASONS (OTHER THAN TAX) FOR SETTING UP A HEADQUARTER COMPANY: A SOUTH AFRICAN OBSERVATION

A headquarter company is a company within a group of companies which supervises and co-ordinates the administrative activities of the group. Headquarter companies are formed for various tax- and non-tax-related reasons depending on the particular needs of the group in which the headquarter company is formed. In the setting up a headquarter-company consideration is given to various key determinants such as political and investment climate, corporate laws and treasury considerations. Tax reasons include deferring tax on income and capital gains, maximizing credit for foreign taxes and reducing withholding taxes. However, when the decision is taken to interpose a headquarter company between the investor country and the operating subsidiaries’ country, the real economic purposes and benefits are usually non-tax in nature. These include the ability to raise external finance, circumventing the application of exchange controls, protection of assets as well as group reorganization and structural consolidation.

Are firms' expectations on the availability of external finance rational, adaptive or regressive?

PurposeThis study investigates which expectation formation mechanism governs Eurozone firms regarding their expectations on external finance availability.Design/methodology/approachIn this study, we link consecutive surveys from the Survey on the Access to Finance of Enterprises to bring new evidence on how non-financial corporations shape their expectations on external finance availability.FindingsIn line with the past literature, we demonstrate that the data reject the Rational Expectations hypothesis, and we find evidence in favor of the Adaptive Expectation mechanism.Originality/valueThis is the first study studying firms' expectations of external finance availability, implementing survey data of firms' expectations from the SAFE database on a country level. The formation of firm expectations is vital in directing policymakers in designing appropriate monetary policies, as both the employment and inflation targets of central banks around the world are highly dependent on the firm-level decision process.

INVESTMENT LIBERALIZATION, CREDIT CONSTRAINTS, AND INTERNATIONAL TRADE

This paper investigates the effect of bilateral investment treaties (BITs) on the extensive and intensive product margins of exports in sectors with different credit constraints. The model in this paper demonstrates that such investment liberalization increases the extensive product margin by lowering the variable costs of selling abroad, while it decreases the intensive product margin by lowering both the fixed investment costs and the variable costs. Moreover, the effects of investment liberalization are stronger in financially more vulnerable sectors. Using a detailed dataset of 190 countries and 27 manufacturing sectors from 1988 to 2006, this paper furnishes robust evidence that BITs increase the extensive margin of exports from developed countries and decrease the intensive margin of exports. It further shows that BITs decrease the intensive margin of exports from developed countries more in the sectors that are more dependent on external finance. Similarly, the intensive margin of exports from developed countries in low tangibility sectors falls by 11.81% because of BITs, while the intensive margin in high tangibility sectors is quite stable with BITs.