Bank Financing and Firm Growth: Evidence from Transition Economies

Abstract

This paper studies how firm financing patterns affect growth and the associated role of country-level economic and institutional development. Using a unique firm-level survey database covering over 20,000 firms in 30 Eastern European and Central Asian countries, I find that firms using formal bank finance grow faster in terms of sales growth, employment growth, and labor productivity growth than those financed from internal and alternative informal sources. I use a battery of robustness checks and the main results hold for a subsample of private firms, for an alternative measure of bank financing, and after controlling for potential endogeneity of the bank financing decision. The positive association between firms’ use of bank financing and growth also holds across different levels of economic, institutional, and financial development of a country. Even in some fast-growing developing economies where formal financial channels serves relatively smaller portion of the private sector, bank financing from formal financial system is related with faster firm growth. My findings question the observed role of informal financing in the literature for some fast-growing developing countries.