Transcript Comments on Faria & Mauro

Comments on
Credit Constraints as a Barrier to
the Entry and Post-Entry Growth
of Firms
Simon Johnson
MIT Sloan
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Summary Assessment
• Growth is largely about entry
– Confirm earlier results
• Availability of external finance constrains
entry
– Nature of constraint and effect varies
systematically across firms
– Most novel here: Size of firms may matter in
this regard
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A (Potential) Debate
• The Finance View
– Access to credit has a first-order effect on
ability to become an entrepreneur (and
therefore growth)
• The Property Rights View
– Only potential entrepreneurs who perceive their
property rights to be secure will make
investments
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An Econometric Problem
• If you do not control for property rights
(instrumented) then the finance variables may
actually be picking up broader institutional effects
– Not a problem if you can instrument convincingly for
finance variables
• But this is hard
• Is there plausible evidence that property rights
matter for entry and post-entry growth of firms?
– See work by John McMillan
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The main finding
• Effect of credit constraint depends on size
of firms
– Relaxing this constraint helps small firms more
than large firms
• “it may even discourage entry by [large firms]” (p.
2)
5
Question #1
• What exactly is “entry by large firms”?
– Is this entry, as in start-up?
– Or entry into the database?
• How does the database handle
– Entry by foreign companies
– Mergers and acquisitions
• This entire measurement issue needs to be at least
1/3 of the paper
– By the way, how big were Microsoft or Intel or Google
or Whole Foods when they first started up?!
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Question #2
• Rajan and Zingales (1998): breakthrough paper for
methodology of studying financial development
– Why 1,000+ papers using this method, and almost no
work checking if nonUS financial dependence of
sectors is really similar/correlated with the US?
• Exception: Subramanian et al (India)
– 1980s vs. 1990s: why such differences?
• R&Z + AJ: robustly, financial development
matters for composition of output (types of
sectors) but NOT for GDP per capita
• AJM: may matter for vertical integration, when
contracting costs are high (CAUTION: new result)
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Question #3
• Djankov et al; Doing Business Indicators
have been a breakthrough for quantifying
and focusing on barriers to entry
– But just putting these in a regression (not
instrumented) may not tell us very much
• Likely correlated with broader institutions
• Probably there is some form of “seesaw” effect:
– If you push down on one end (lower some cost for new
entrants to become large firms) then the other end will pop
up (some other costs/barriers emerge)
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Question #4
• If you have a potentially endogenous rhs variable
or other issues is it [still] just OK to find a
possibly more exogenous variable as an
instrument?
– Don’t we need more theory and evidence (also from
outside the regression framework being used) to
support the exclusion restriction?
– There is a great deal of confusion over the “other
channels” issue, but this is a potentially important point
• What are the deep determinants (of growth) and how are the
effects of these manifest?
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The Limits to Knowledge
(Today)
• What are the robust facts?
1. Financial development matters
–
–
For the composition of output: agreed
For GDP per capita: contested
2. Legal origin matters
–
–
•
What are the implications for Entry?
–
•
for financial development: probably
For GDP per capita: no
Composition vs. level of output?!
Property rights & security of investment cannot
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safely be omitted from the regression
Policy Implications
•
We need rules, not discretion, for:
–
–
•
Sometimes the new findings are sufficiently
convincing and important that we should change
our views
–
•
•
Updating our stock of useful knowledge based on
new research
Apply the same rules across different kinds of
research (but you can’t randomize everything!)
Resist fashion, if you can (hence the need for rules)
Emphasize robustness, replication, and data
revisions
First, do no harm
–
Agreed, but what if you are in a crisis?
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