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The Value of Business Networks in Emerging Economies: An Analysis of Firms' External Financing Opportunities

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Author Info

  • Owolabi, Oluwarotimi

    ()
    (Brunel University)

  • Pal, Sarmistha

    ()
    (University of Surrey)

Abstract

The paper argues that networked firms are likely to have an advantage in securing external finance in countries with weak legal and judicial institutions since it helps financial institutions to minimize the underlying agency costs of lending. An analysis of recent BEEPS data from fifteen Central and Eastern European (CEE) countries lends some support to this hypothesis. Even after controlling for other factors, firms affiliated to business associations are more likely to secure bank finance. Importance of being associated with business networks is particularly evident among firms who borrow from private domestic and foreign banks, as these new banks attempt to minimize costs of adverse selection. Networking however discriminates against the small and medium sized firms' access to bank loans in the CEE regions. Results are robust in both single cross-section and panel data analyses.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5738.

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Length: 48 pages
Date of creation: May 2011
Date of revision:
Publication status: published as 'Does business networking boost firms' external financing opportunities? Evidence from Central and Eastern Europe' in: Applied Financial Economics, 2013, 23 (5), 415-432
Handle: RePEc:iza:izadps:dp5738

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Related research

Keywords: agency costs; external firm financing; endogeneity; bank loans; business networks; transition economies;

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References

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  1. Berger, Allen N. & Klapper, Leora F. & Martinez Peria, Maria Soledad & Zaidi, Rida, 2008. "Bank ownership type and banking relationships," Journal of Financial Intermediation, Elsevier, vol. 17(1), pages 37-62, January.
  2. Detragiache, Enrica & Garella, Paolo & Guiso, Luigi, 1997. "Multiple Versus Single Banking Relationships," CEPR Discussion Papers 1649, C.E.P.R. Discussion Papers.
  3. Ralph De Haas & Daniel Ferreira & Anita Taci, 2007. "What determines banks’ customer choice? Evidence from transition countries," Working Papers 104, European Bank for Reconstruction and Development, Office of the Chief Economist.
  4. Klapper, Leora & Sarria-Allende, Virginia & Sulla, Victor, 2002. "Small and medium size enterprise financing in Eastern Europe," Policy Research Working Paper Series 2933, The World Bank.
  5. Beck, Thorsten & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2002. "Financial and legal constraints to firm growth - Does size matter?," Policy Research Working Paper Series 2784, The World Bank.
  6. Rafael La Porta & Florencio Lopez-de-Silanes & Cristian Pop-Eleches & Andrei Shleifer, 2004. "Judicial Checks and Balances," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 445-470, April.
  7. Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December.
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Cited by:
  1. Cho, Yoon Y. & Kalomba, Davie & Mobarak, A. Mushfiq & Orozco, Victor, 2013. "Gender Differences in the Effects of Vocational Training: Constraints on Women and Drop-Out Behavior," IZA Discussion Papers 7408, Institute for the Study of Labor (IZA).

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