Transcript Document

Financial Constraints,
Entry and
Post-Entry Growth
P.Aghion, T.Fally, S.Scarpetta
Conference on Access to Finance,
Wordlbank, March 15-16, 2007
1
Motivation

Firm dynamics is good for productivity growth because:
(1) New firms replace inefficient incumbents
(2) It promotes efficiency-enhancing investment by incumbents

Previous studies emphasize:



Adjustment costs induced by incumbent R&D and advertizing
Administrative costs of creating new firms
Labor market regulations
We investigate the role of financial constraints as barriers to entry,
selection and post-entry growth
P.Aghion, T.Fally, S.Scarpetta
Conference on Access to Finance,
Wordlbank, March 15-16, 2007
2
In this paper
Effects of financial development on entry
by firm size
 Effects of financial development on postentry growth
 We use a harmonized firm-level cross
country panel data set covering whole
population of firms across 16 countries

P.Aghion, T.Fally, S.Scarpetta
Conference on Access to Finance,
Wordlbank, March 15-16, 2007
3
Main findings
FD has a strong positive impact on entry
and post-entry growth of firms
 Impact is larger for small firms and may
become negative for larger firms
 Robust to controlling for entry costs and
labor market regulations
 Labor market regulations not significantly
correlated with post-entry growth

P.Aghion, T.Fally, S.Scarpetta
Conference on Access to Finance,
Wordlbank, March 15-16, 2007
4
Setup

Two goods (partial equilibrium analysis):

A numeraire that serves as a production and entry input
 A consumption good, at price p with a demand D(p)

Each period t, there is a mass 1 of potential entrepreneurs in the
consumption good market.
An entrepreneur lives two periods. She is characterized by:


Initial capacity T1 (potential number of employees at date t)
Long-term capacity T2 (potential number of employees at date t+1)
For simplicity, each employee produce one unit and wages equal zero.

There is a large number of investors who can only assess the shortterm capacity of potential entrepreneurs
P.Aghion, T.Fally, S.Scarpetta
Conference on Access to Finance,
Wordlbank, March 15-16, 2007
5
Timing

At time t (short term):
 Entrepreneurs decide whether to enter and pay a sunk cost b.
They may borrow from investors.
 Entrepreneurs that enter produce and sell at equilibrium price p
 By investing K units of the numeraire good, entrepreneurs may
expand their long-term capacity from T1 to (1+αK)T1

At time t+1 (long term):
 Entrepreneurs produce and sell at equilibrium price p
 Entrepreneurs repay their debt
P.Aghion, T.Fally, S.Scarpetta
Conference on Access to Finance,
Wordlbank, March 15-16, 2007
6
Solving the model without capacity expansion

Initial capacity threshold: ex post enforcement requires:
L < μ pT0
where μ >1
Thus, initial capacity may not be lower than:
T*0 = b / μp
 The initial capacity threshold is decreasing in μp.

Long term capacity threshold:
Profits must be higher than sunk entry costs:
T = pT0 + δpT1 > b  T1 > T*1 = b / δp - T0 / δ
 The long-term capacity threshold is decreasing with p.

Price equilibrium: D(p) = S(µp, p)
D’(p) is decreasing in p and S(µp, p) is increasing in µp and p.
P.Aghion, T.Fally, S.Scarpetta
Conference on Access to Finance,
Wordlbank, March 15-16, 2007
7
Impact of financial development

Increase the ability to borrow (proportional to μp)
 Lowers the initial capacity threshold T*0

Lowers the equilibrium price p:
 Increases the long-term capacity threshold T*1

Impact on entry and post-entry growth:
 Increases entry by small firms
(firms just below the previous short term capacity threshold T*0)
 Decreases entry by large firms
(firms just above the previous long-term capacity threshold T*1)
 Increases post-entry growth because:
reduces size at entry & increases growth potentials
P.Aghion, T.Fally, S.Scarpetta
Conference on Access to Finance,
Wordlbank, March 15-16, 2007
8
Figure 2: Impact on entry of an increase of financial development from µ0 to µ1
θ1
(long-term
size)
+
+
θ*1
entry
no
entry
-
0
θ*0
P.Aghion, T.Fally, S.Scarpetta
Conference on Access to Finance,
Wordlbank, March 15-16, 2007
θ0
(initial size)
9
Solving the model with capacity expansion

Higher financial development raises post-entry growth
as it increases investment in capacity expansion while
again lowering the short-term capacity threshold
P.Aghion, T.Fally, S.Scarpetta
Conference on Access to Finance,
Wordlbank, March 15-16, 2007
10
Tested predictions

Impact of financial development:
1.
Increase entry by small firms
2.
Decrease entry by large firms
3.
Increase post-entry growth
•

Even if we control by the size at entry
Partial equilibrium analysis (ignoring economy
wide effects through wage and exit options)
P.Aghion, T.Fally, S.Scarpetta
Conference on Access to Finance,
Wordlbank, March 15-16, 2007
11
DATA (1)

Coverage : 16 countries (US, Western and Eastern
Europe, Latin America) and 30 sectors, during 1990’s.

“Entry” = entry in the database




Reflects real entry of all (1+) firms
Excludes one-year firms
Entry rates are calculated by size categories:
s1: 1-19; s2: 20-49; s3: 50-99; s4: 100-499; s5: 500+
“Post-entry growth”= employment growth of surviving firms

Calculated as employment 6 years after entry among surviving
firms compared with employment at entry
P.Aghion, T.Fally, S.Scarpetta
Conference on Access to Finance,
Wordlbank, March 15-16, 2007
12
DATA (2)

Indicators on financial development (outcome):



Private credit / GDP
Stock market capitalization / GDP
Synthetic index: FD = (credit + stock) / GDP
We also consider regulatory variables:

Bank:




Government ownership
Entry requirements
Regulation of activity
Barriers to foreign entry

Market:


Investor protection
Public or Private registry
(Doing Business 2006, Djankov
McLiesh Shleifer 2006)
(Barth Caprio Levine 2003, Micco,
Panizza, Yañez 2004, Gwartney,
Lawson 2004)
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Methodology
Difference in difference approach (Rajan Zingales 1998):
 We test whether financial development has a differential impact
in sectors depending on external finance
 It allows including a variety of fixed effects (by country and sector)
 Other policy variables as controls:

Employment protection legislation (Frazer Institute)
Interacted with the intensity of jobflows in US
(source: Bartelsman et al. database)

Entry cost (Frazer Institute)
Interacted with the turnover rates in US or with the growth potential of the
sector (source: STAN, OECD)
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Estimated equations

Entry (by country c, industry i, year t and size s):
S
Entryc, i,s, t    s ( FinDev c  ExtFini )  controls
s 1
C

c 1

S

s 1
I
c, s
Dc, s  
i 1
S

s 1
T
i,s
Di,s    t Dt   c, i,s, t
t 1
Post-entry growth (by country c and industry i):
PEGc, i   ( FinDev c  ExtFini )  controls
C
I
c 1
i 1
   c Dc    i Di   c,i
P.Aghion, T.Fally, S.Scarpetta
Conference on Access to Finance,
Wordlbank, March 15-16, 2007
15
Table 1: Entry rates, average impact of financial development
(coefficients are constrained to equality across size categories)
FD
* ExtDep
Credit
* ExtDep
Stock
* ExtDep
Observations
R-squared
(1)
0.625
[0.231]***
Entry rate
(2)
(3)
1.068
[0.385]***
10169
0.31
10169
0.31
P.Aghion, T.Fally, S.Scarpetta
Conference on Access to Finance,
Wordlbank, March 15-16, 2007
1.048
[0.514]**
10169
0.31
16
Table 2: Entry rates, impact of financial development by size
Entry rate
Credit
* ExtDep * s1
Credit
* ExtDep * s2
Credit
* ExtDep * s3
Credit
* ExtDep * s4
Credit
* ExtDep * s5
Stock
* ExtDep * s1
Stock
* ExtDep * s2
Stock
* ExtDep * s3
Stock
* ExtDep * s4
Stock
* ExtDep * s5
Measures of financial
development:
Observations
R-squared
(1)
2.679
[0.757]***
1.339
[0.644]**
0.618
[0.770]
0.404
[0.754]
-1.480
[0.779]*
(2)
2.064
[0.994]**
1.881
[1.091]*
-0.423
[1.240]
1.118
[1.000]
-0.228
[1.254]
Private credit or stock
market over GDP
10169
10169
0.31
0.31
(3)
2.525
[0.942]***
1.871
[0.991]*
0.646
[0.942]
-0.324
[0.819]
-1.126
[0.925]
(4)
2.731
[1.366]**
2.030
[1.144]*
0.156
[1.185]
0.424
[1.063]
-0.719
[1.175]
Instrumented by policy
variables
10169
10169
0.31
0.31
(5)
3.574
[1.872]*
3.842
[1.262]***
1.960
[1.987]
0.843
[1.649]
-2.748
[2.280]
(6)
4.521
[1.897]**
2.942
[1.704]*
1.240
[1.855]
1.790
[1.608]
-2.240
[1.813]
Simple average of policy
variables
10169
10169
0.31
0.31
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Table 3: Entry rates, controlling for other policy variables
Credit
* ExtDep * s1
Credit
* ExtDep * s2
Credit
* ExtDep * s3
Credit
* ExtDep * s4
Credit
* ExtDep * s5
Policy
* Industry factor * s1
Policy
* Industry factor * s2
Policy
* Industry factor * s3
Policy
* Industry factor * s4
Policy
* Industry factor * s5
Policy variable:
Industry factor:
Observations
R-squared
Controls {
Entry rate
(1)
2.692
[1.063]**
2.344
[1.151]**
1.291
[1.022]
-0.432
[0.779]
-0.969
[1.170]
(3)
2.543
[1.059]**
2.036
[1.093]*
0.843
[1.082]
-0.890
[0.904]
-1.508
[1.096]
(5)
2.864
[1.994]
4.136
[1.881]**
0.705
[2.005]
-2.603
[1.948]
-0.360
[1.584]
-0.934
[0.573]
-1.277
[0.597]**
-1.451
[0.636]**
0.364
[0.412]
0.336
[0.220]
0.379
[0.271]
-0.427
[0.416]
-0.349
[0.252]
0.218
[0.379]
-1.218
[0.698]*
-1.004
[0.476]**
0.025
[0.278]
-0.024
[0.426]
-0.787
[0.536]
-1.201
[0.507]**
EPL
JobflowsUS
9189
0.30
Entry cost
TurnoverUS
9189
0.30
Entry cost
RdlvaUS
9034
0.30
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Table 4: Post-entry growth after 6 years, impact of financial development
Credit
* ExtDep
Stock
* ExtDep
Measure of financial
development:
Observations
R-squared
(1)
0.392
[0.145]***
(2)
0.462
[0.255]*
Private credit or stock
market over GDP
319
319
0.32
0.31
Post-entry growth
(3)
(4)
0.446
[0.169]***
0.617
[0.239]**
Instrumented by policy
variables
319
319
0.32
0.32
P.Aghion, T.Fally, S.Scarpetta
Conference on Access to Finance,
Wordlbank, March 15-16, 2007
(5)
0.569
[0.264]**
(6)
0.880
[0.343]**
Simple average of policy
variables
319
319
0.31
0.32
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Table 5: Post-entry growth after 6 years, controlling for other policy variables
Credit
* ExtDep
Stock
* ExtDep
EPL
* Jobflows US
Size at
entry
Observations
R-squared
(1)
0.424
[0.190]**
0.019
[0.028]
291
0.33
Post-entry growth
(2)
(3)
0.380
[0.125]***
0.841
[0.391]**
0.020
[0.029]
-0.214
[0.047]***
291
319
0.33
0.42
P.Aghion, T.Fally, S.Scarpetta
Conference on Access to Finance,
Wordlbank, March 15-16, 2007
(4)
0.527
[0.181]***
-0.214
[0.046]***
319
0.42
20
Robustness checks

Sensibility to the set of countries and sectors

Controls for convergence effects (industry share)

Interaction with potential growth (industry growth in US) instead of
dependence in external finance

Controls for incumbent size growth

Post-entry growth at different durations

Total employment growth of the cohort
P.Aghion, T.Fally, S.Scarpetta
Conference on Access to Finance,
Wordlbank, March 15-16, 2007
21
EU countries versus US
Lower competition and higher regulations
in EU versus US banking
 Stock market capitalisation over GDP:
0.64 for EU15 versus 1.17 for US in 2003
 Venture capital: 0.5% of GDP in US versus
less than 0.15% for Germany, France,
Spain, Italy.

P.Aghion, T.Fally, S.Scarpetta
Conference on Access to Finance,
Wordlbank, March 15-16, 2007
22