The Effect of Foreign Banks in Financing Firms, Especially Small Firms, in Transition Economies

This paper investigates if the presence of foreign banks in transition economies reduces or increases firms' financing obstacles and if they tend to discriminate between different sizes of firms, in terms of access to financing and the cost of financing obstacles. To our knowledge, this is the first study to investigate small firms' financing obstacles due to the presence of foreign banks in a transition environment. We use the data set from the Business Environment and Enterprise Performance Survey 2005, conducted by the European Bank for Reconstruction and Development (EBRD) and World Bank, together with macroeconomic data from EBRD. Our sample contains more than 7,500 firms in twenty-five transition economies. We employ a logit estimation method; to check the robustness of the results, we also employ the ordered logit estimation method. We find that a higher asset share of foreign-owned banks tends to increase firms' financing obstacles, but that foreign banks do not appear to discriminate among the different sizes of the firms. However, small and medium-size firms are more likely to report higher financing obstacles than large firms, regardless of bank ownership.