Abstract
ABSTRACT We explore the impact of financing constraints and the role of banking markets integration on the growth of small and medium enterprises (SMEs). The data are drawn from the European Central Bank/Survey on the Access to Finance of Enterprises (ECB/SAFE) on SMEs’ access to finance aggregated at the country level for the largest 11 euro area countries during 2009–2015. Our findings suggest that financing constraints hamper SMEs’ growth and that the effect is stronger for perceived, rather than actual, financing constraints. On the other hand, increased banking markets integration in the euro area appears to foster SMEs’ growth. Furthermore, we found that the reduction in financing constraints is crucial in the transmission channel from banking markets integration to growth. This effect appears significantly stronger when integration is measured by the intensity of cross-border lending than through convergence in interest rates to loans to nonfinancial corporations.
Highlights
How does access to finance in the euro area impact on the growth of small and medium enterprises (SMEs)? To what extent does integration in banking markets play a role in reducing financing constraints for small businesses? In this article, we attempt to answer these important questions and adopt a broad definition of access to finance to include demand and supply side factors
In terms of how the sector composition affected growth, our results show that the average growth of SMEs in services was higher than that in the construction sector, despite being the least represented sector (Table 2), while the trade sector had a higher average growth of SMEs than the one in services
What are the channels through which the above-mentioned benefits of banking markets integration on growth of SMEs are transmitted is an issue we tackled in subsection Can banking market integration alleviate SMEs' financing constraints? we investigated the potential of increased banking integration to alleviate the adverse effects of bank financing constraints on growth
Summary
How does access to finance in the euro area impact on the growth of small and medium enterprises (SMEs)? To what extent does integration in banking markets play a role in reducing financing constraints for small businesses? In this article, we attempt to answer these important questions and adopt a broad definition of access to finance to include demand and supply side factors. Financial intermediation theories (Diamond, 1984; Leland & Pyle, 1977) focus on the characteristics and nature of bank relationships and the role of signaling (for example, internal financing and collateral) in reducing credit rationing. According to this view, debt contracts are the optimal methods of financing, and relationship lending can improve information quality. The supply approach considers the impact of the availability and cost of external financing in the European Union (EU) single market and explores whether and to what extent more integrated banking markets reduce loan prices and increase credit availability, thereby benefiting euro area small and medium firms’ growth. If a more integrated banking market is found to be conducive to growth, important policy implications can implicitly be drawn
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