Bank Credit and Business Networks
AbstractWe construct the topology of business networks across the population of firms in an emerging economy, Pakistan, and estimate the value that membership in large yet diffuse networks brings in terms of access to bank credit and improving financial viability. We link two firms if they have a common director. The resulting topology includes a "giant network" that is order of magnitudes larger than the second largest network. While it displays "small world" properties and comprises 5 percent of all firms, it accesses two-thirds of all bank credit. We estimate the value of joining this giant network by exploiting "incidental" entry and exit of firms over time. Membership increases total external financing by 16.6 percent, reduces the propensity to enter financial distress by 9.5 percent, and better insures firms against industry and location shocks. Firms that join improve financial access by borrowing more from new lenders, particularly those already lending to their (new) giant-network neighbors. Network benefits also depend critically on where a firm connects to in the network and on the firm's pre-existing strength.
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Bibliographic InfoPaper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp11-017.
Date of creation: Mar 2011
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Other versions of this item:
- D02 - Microeconomics - - General - - - Institutions: Design, Formation, and Operations
- D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-02 (All new papers)
- NEP-BAN-2011-04-02 (Banking)
- NEP-MIC-2011-04-02 (Microeconomics)
- NEP-NET-2011-04-02 (Network Economics)
- NEP-URE-2011-04-02 (Urban & Real Estate Economics)
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