2014年-世界发展银行全球_Does_Local_Financial_Development_Matter_for_Firm_Lifecycle_in_India__64页_1mb

Summary of "Does Local Financial Development Matter for Firm Lifecycle in India?"

Core Content

This working paper investigates the relationship between local financial development and firm lifecycle in India. It uses detailed census data from the formal and informal manufacturing sectors to analyze how financial institutions and labor regulations influence the growth and size of firms over time.

Main Findings

• Financial Development and Firm Lifecycle: Despite significant differences in financial development across Indian states, the impact of financial institutions on firm lifecycle is found to be marginal. This is true for the overall population of firms and most sub-samples analyzed.

• Robustness of Results: The findings are robust to various checks, including the analysis of firms in the right tail of size distributions, differences in labor market regulation (flexible vs. rigid), and alternative indicators of financial development.

• Financial Dependence of Industries: The extent of financial dependence of industries does not predict differences in firm lifecycle across Indian states. Firms in financially dependent industries are not found to grow faster or be larger in financially developed states compared to underdeveloped states.

• Firm Size and Age Relationship: In the formal manufacturing sector, firms tend to grow in size as they age. The average 40-year-old firm is 2 to 4 times the size of firms less than five years old. However, in the informal sector, older firms tend to employ fewer people than younger firms.

• Contrast with Other Studies: These results contrast with the literature that highlights the importance of within-country institutional differences on firm performance. The paper suggests that in India, the state-dominated financial system may mask the effects of financial development on firm growth due to other institutional and firm-specific factors.

• Impact of Financial Liberalization: There is no evidence that the financial liberalization of 1991 or industry de-licensing has significantly altered the role of financial development on firm lifecycle.

• Comparative Insights: The study aligns with findings from other developing countries, such as China, where state-ownership in the banking sector is associated with limited impact on firm growth. It also provides evidence that the size-age profile of Indian firms is relatively flat compared to the U.S., where the ratio is much higher.

Key Variables and Methodology

• Firm Size and Age: Defined as the total number of workers and the year of initial production, respectively. Firm Size Ratio is used to measure growth, calculated by scaling each firm's size relative to the average size of its birth cohort.

• Financial Development: Measured by the ratio of total commercial bank credit to net state domestic product (SDP). A dummy variable (FD) is constructed to classify states as financially developed or underdeveloped based on this ratio.

• Labor Market Regulation: Measured using a composite index that classifies states as having flexible or rigid labor regulations. This index is based on state-level amendments to the Industrial Disputes Act and is used to assess the impact of labor regulations on firm growth.

• Industry Classification: Three industry classifications are used:

  • Small Firm Industry: Based on the share of employment in firms with less than 20 employees.
  • Labor Intensive Industries: Based on the methodology of Hasan and Jandoc (2012).
  • External Finance Dependence (EFD): Based on the RZ index, which measures the extent of external finance dependence using U.S. data.

Key Implications

• State-Owned Financial System: The paper suggests that the state-owned and controlled financial system in India may be a barrier to the effectiveness of financial development in promoting firm growth.

• Dual Economy Perspective: The findings support the dual economy view, which posits that formal and informal firms differ significantly in terms of size, productivity, and other characteristics. Growth in developing countries is attributed to the creation of highly productive formal firms, not the transformation of informal firms into formal ones.

• Policy Reforms: The study has important implications for financial system reforms in India, suggesting that institutional inefficiencies, particularly in state-owned banks, may overshadow the benefits of financial development.

Conclusion

The paper concludes that while there are substantial differences in financial development across Indian states, these differences do not significantly influence firm lifecycle or growth. The role of financial institutions in firm growth is limited, and other factors such as labor regulations and institutional inefficiencies may play a more significant role in shaping the growth trajectories of firms in India.