Abstract
This paper investigates the impact of leverage on labour productivity of companies operating in the Baltic countries, with a focus on differences between local and multinational companies. We employ a fixed effects regression model on company level data, covering the period from 2001 to 2008. Our results demonstrate that the impact of leverage on labour productivity is non-linear and it differs dramatically between local and multinational companies. In the case of local companies, at low levels of leverage, an increase in external financing tends to bring along an improvement in labour productivity, while at higher levels of leverage an increase in debt financing appears to result in a loss of labour productivity. For multinational companies, the impact of leverage on labour productivity tends to be more linear and leverage appears to have a negative impact on labour productivity. Although debt overhang is believed to be an issue in the Baltic countries in general, local companies with low leverage might be able to increase labour productivity by additional borrowing.
Highlights
Achievement of sustainable economic growth is a central goal for economies worldwide
Empirical results of Avarmaa et al (2011) indicate a positive relationship between credit constraints and leverage in the local companies operating in the Baltic countries
At low level of leverage an increase in leverage appears to be related to an improvement in labour productivity, and after a certain breakpoint leverage tends to have a negative impact on labour productivity
Summary
Achievement of sustainable economic growth is a central goal for economies worldwide. The neoclassical growth theory drawn on the seminal work of Solow (1956) demonstrates that productivity growth is one of the main drivers for long-term GDP growth per capita. This relationship has found strong empirical support Understanding the determinants of productivity at a micro level as well as the related challenges and opportunities in a broader context are key elements for exploring the paths for economic growth. The impact of leverage on productivity and long-term growth deserves closer scrutiny
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