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Credit constraints as a barrier to the entry and post-entry growth of firms

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Author Info
Philippe Aghion
Thibault Fally
Stefano Scarpetta

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Abstract

"Advanced market economies are characterized by a continuous process of creative destruction. Market forces and technological developments play a major role in shaping this process, but institutional and policy settings also influence firms' decision to enter, to expand if successful and to exit if competition becomes unbearable. In this paper we focus on the effects of financial development on the entry of new firms and the expansion of successful new businesses. Drawing from harmonized firm-level data for 16 industrialized and emerging economies, we find that access to finance matters most for the entry of small firms and in sectors that are more dependent upon external finance. This finding is robust to controlling for other potential entry barriers (labour market regulations and entry regulations). On the other hand, financial development has either no effect or a negative effect on entry by large firms. Access to finance also helps new firms expand if successful. Both private credit and stock market capitalization are important for promoting entry and post-entry growth of firms. Altogether, these results suggest that, despite significant progress over the past decade, many countries, including those in Continental Europe, should improve their financial markets so as to get the most out of creative destruction, by encouraging the entry of new (especially small) firms and the post-entry growth of successful young businesses." Copyright (c) CEPR, CES, MSH, 2007.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0327.2007.00190.x
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Publisher Info
Article provided by CEPR, CES, MSH in its journal Economic Policy.

Volume (Year): 22 (2007)
Issue (Month): (October)
Pages: 731-779
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Handle: RePEc:bla:ecpoli:v:22:y:2007:i::p:731-779

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Deiaco, Enrico & Homén, Magnus & McKelvey, Maureen, 2008. "What does it Mean Conceptually that Universities Compete?," Working Paper Series in Economics and Institutions of Innovation 139, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies. [Downloadable!]
  2. Patrick Musso & Stefano Schiavo, 2008. "The impact of financial constraints on firm survival and growth," Journal of Evolutionary Economics, Springer, vol. 18(2), pages 135-149, April. [Downloadable!] (restricted)
    Other versions:
  3. Hvide, Hans K. & Møen, Jarle, 2007. "Liquidity Constraints and Entrepreneurial Performance," Discussion Papers 2007/21, Department of Finance and Management Science, Norwegian School of Economics and Business Administration. [Downloadable!]
    Other versions:
  4. Tullio Jappelli & Marco Pagano, 2008. "Financial Market Integration Under EMU," CSEF Working Papers 197, Centre for Studies in Economics and Finance (CSEF), University of Salerno, Italy. [Downloadable!]
  5. Sybrand Schim van der Loeff & Pierre Mohnen & Franz Palm & A. Tiwari, 2008. "Financial Constraints and other Obstacles: Are they a Threat to Innovation Activity?," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  6. William Kerr & Ramana Nanda, 2006. "Democratizing Entry: Banking Deregulations, Financing Constraints, and Entrepreneurship," Working Papers 07-033, Harvard Business School, revised Oct 2008. [Downloadable!]
    Other versions:
  7. Nuno Barrau, Galo, 2008. "Schumpeterian Foundations of Real Business Cycles," MPRA Paper 9430, University Library of Munich, Germany. [Downloadable!]
  8. Rodriguez, Camila & Stephanou, Constantinos, 2008. "Bank financing to small and medium-sized enterprises (SMEs) in Colombia," Policy Research Working Paper Series 4481, The World Bank. [Downloadable!]
  9. Kiminori Matsuyama, 2007. "Aggregate Implications of Credit Market Imperfections," NBER Working Papers 13209, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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