Financing sources and firm level productivity growth: evidence from Indian manufacturing

Sourafel Girma, Dev Vencappa*

*Corresponding author for this work

Research output: Contribution to journalArticle

Abstract

A large literature provides empirical evidence that financial development enhances welfare by stimulating economic efficiency and offering more profitable growth opportunities, although the issues of identifying the exact mechanisms through which finance enhances welfare and dealing with the simultaneity between financial development and growth still remain contentious. This paper takes a firm-level approach to study the link between financing sources and firm growth in India. We start by observing that (domestic) financial underdevelopment should not necessarily constrain all firms’ growth opportunities equally, given they can also access other non-bank finance sources such as retained earnings, foreign finance and government borrowings. Similarly, it is unrealistic to assume that similar financial structure will generate homogenous effects across firms. These considerations motivate our research questions of whether financing sources matter for firms’ productivity growth and whether this depends on firm characteristics such as ownership and size. We answer these questions using a rich micro panel data set and employing econometric techniques that deal with the potential reverse causality from financial structure to productivity growth. We find that relative to retained earnings, bank and nonbank finances positively affect firm level productivity growth with bank loans having the largest and government borrowings the least effect on growth. Size is found to play a mediating role in the finance-growth nexus: access to bank loans (nonbank finance) disproportionately benefits smaller (bigger) firms. Further analysis around ownership structure suggests that all else equal, it would appear that financial structure matters only for the growth of domestic private firms.

Original languageEnglish
Pages (from-to)283-292
Number of pages10
JournalJournal of Productivity Analysis
Volume44
Issue number3
DOIs
Publication statusPublished - 1 Dec 2015

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manufacturing
productivity
firm
finance
evidence
bank
loan
welfare
Finance
Financing
Manufacturing
Productivity growth
ownership structure
underdevelopment
economic efficiency
causality
econometrics
Financial structure
India
Government

Keywords

  • Bank loans
  • Endogeneity
  • Finance-growth nexus
  • Financing sources
  • Total factor productivity growth

Cite this

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abstract = "A large literature provides empirical evidence that financial development enhances welfare by stimulating economic efficiency and offering more profitable growth opportunities, although the issues of identifying the exact mechanisms through which finance enhances welfare and dealing with the simultaneity between financial development and growth still remain contentious. This paper takes a firm-level approach to study the link between financing sources and firm growth in India. We start by observing that (domestic) financial underdevelopment should not necessarily constrain all firms’ growth opportunities equally, given they can also access other non-bank finance sources such as retained earnings, foreign finance and government borrowings. Similarly, it is unrealistic to assume that similar financial structure will generate homogenous effects across firms. These considerations motivate our research questions of whether financing sources matter for firms’ productivity growth and whether this depends on firm characteristics such as ownership and size. We answer these questions using a rich micro panel data set and employing econometric techniques that deal with the potential reverse causality from financial structure to productivity growth. We find that relative to retained earnings, bank and nonbank finances positively affect firm level productivity growth with bank loans having the largest and government borrowings the least effect on growth. Size is found to play a mediating role in the finance-growth nexus: access to bank loans (nonbank finance) disproportionately benefits smaller (bigger) firms. Further analysis around ownership structure suggests that all else equal, it would appear that financial structure matters only for the growth of domestic private firms.",
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Financing sources and firm level productivity growth : evidence from Indian manufacturing. / Girma, Sourafel; Vencappa, Dev.

In: Journal of Productivity Analysis, Vol. 44, No. 3, 01.12.2015, p. 283-292.

Research output: Contribution to journalArticle

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