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Government credit policy and industrial performance : Japanese machine tool producers, 1963-91

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  • Calomiris, Charles W.
  • Himmelberg, Charles P.

Abstract

Programs to direct credit to industry can be uniquely beneficial if 1) the purpose of government credit is to relax borrowing constraints on firms, as an end in itself, or (2) other government objectives can best be achieved by relaxing firms'borrowing constraints (in which case, product and factor market externalities motivate government credit programs). According to Japanese officials, government involvement is warranted when: 1) investment risk is too high for a particular activity (because it is too large-scale or high-tech, or needs long gestation and market development); 2) there is a big discrepancy between private and social benefits when industries or parts of industries may save foreign exchange, for example, and thus relieve the balance of payments constraint on other growth industries); 3) information problems discourage lending to small and medium-scale industries; 4) infant industries face large social set-up costs. The authors examine the effect of policy-based finance for the period 1963-91 for Japan's machine tool industry, an industry with high potential spillover effects on technological innovation and learning. They found that directed credit may have helped to promote investment among postwar Japanese machine tool producers. Important components of that credit seem to have spurred growth. The government credit programs did not crowd out private funds and did not succeed by providing a permanent lifeline (credit insurance) to firms. But the authors do not endorse government interventions in credit markets. For one thing, the effective operation of industrial directed credit in Japan seems to be an unrepresentative case. In many countries, such government intervention has produced large costs: inefficient borrowers have been funded and public funds have been captured by special interests. In Japan, directed-credit policy is designed to promote investment, crowd in private funds, and avoid the capture of policy funds by particular firms or industries. The priorities of credit policy are determined as part of a national plan with broad participation (rather than by special-interest lobbying), and once industry-level priorities have been established, firm-level lending decisions by agencies are shielded from political pressure. In political systems that cannot implement such effective plans for distributing industrial credit, government-directed credit programs may create more problems than they solve.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1434.

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Date of creation: 31 Mar 1995
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Handle: RePEc:wbk:wbrwps:1434

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Keywords: Payment Systems&Infrastructure; Banks&Banking Reform; Economic Theory&Research; Environmental Economics&Policies; Financial Intermediation; Banks&Banking Reform; Economic Theory&Research; Environmental Economics&Policies; Financial Intermediation; International Terrorism&Counterterrorism;

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  1. Takeo Hoshi & David S. Scharfstein & Kenneth J. Singleton, 1993. "Japanese Corporate Investment and Bank of Japan Guidance of Commercial Bank Lending," NBER Chapters, in: Japanese Monetary Policy, pages 63-94 National Bureau of Economic Research, Inc.
  2. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1990. "The Role of Banks in Reducing the Costs of Financial Distress in Japan," NBER Working Papers 3435, National Bureau of Economic Research, Inc.
  3. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-95, November.
  4. Sato, Kazuo, 1990. "Indicative planning in Japan," Journal of Comparative Economics, Elsevier, vol. 14(4), pages 625-647, December.
  5. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
  6. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1990. "Bank Monitoring and Investment: Evidence from the Changing Structure of Japanese Corporate Banking Relationships," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 105-126 National Bureau of Economic Research, Inc.
  7. Zvi Griliches & Jacques Mairesse, 1985. "R&D and Productivity Growth: Comparing Japanese and U.S. Manufacturing Firms," NBER Working Papers 1778, National Bureau of Economic Research, Inc.
  8. Ohno, K., 1992. "Dynamism of japanese Manufacturing: Evidence from the Postwar Period," Papers 96, Brookings Institution - Working Papers.
  9. J. Bradford DeLong & Lawrence H. Summers, 1992. "Equipment Investment and Economic Growth: How Strong Is the Nexus?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 157-212.
  10. Mayer, Colin, 1987. "New Issues in Corporate Finance," CEPR Discussion Papers 181, C.E.P.R. Discussion Papers.
  11. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Bank monitoring and investment: evidence from the changing structure of Japanese corporate banking relations," Finance and Economics Discussion Series 86, Board of Governors of the Federal Reserve System (U.S.).
  12. Horiuchi Akiyoshi & Sui Qing-yuan, 1993. "Influence of the Japan Development Bank Loans on Corporate Investment Behavior," Journal of the Japanese and International Economies, Elsevier, vol. 7(4), pages 441-465, December.
  13. Vittas, Dimitri & Wang, Bo, 1991. "Credit policies in Japan and Korea : a review of the literature," Policy Research Working Paper Series 747, The World Bank.
  14. Sheard, Paul, 1989. "The main bank system and corporate monitoring and control in Japan," Journal of Economic Behavior & Organization, Elsevier, vol. 11(3), pages 399-422, May.
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