Bank development, competition, and entrepreneurship: International evidence

Abstract

This paper uses a panel database for 84 countries over the 2002–2017 period to analyze the importance of bank development and bank market competition for enhancing new business creation. The results show that less bank market competition facilitates the creation of new businesses. Bank development, however, is not associated with a higher entry rate of new businesses. Less bank market competition and lending relationships appear to be a main channel for reducing the cost of debt and overcoming traditional adverse selection and moral hazard problems between banks and newly created firms. The global financial crisis did not modify the positive effect of less bank market competition on new firm registration. The results are robust to controls for equity market development, the ability of banks to hold equity positions in nonfinancial firms, the costs and days required for starting a business, and any other omitted time-invariant variables at country level.