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The Unequal Effects of Financial Development on Firms' Growth in India

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  • Maria Bas
  • Antoine Berthou

Abstract

This paper investigates the microeconomic effects of financial development on economic growth. The increased availability of credit is usually expected to improve firms’ growth due to the elimination of credit constraints. We investigate this question using a survey of Indian firms in the manufacturing industry during the period 1997-2006, in a context of rapid economic growth and underlying structural changes. We examine how changes in the level credit over GDP in Indian States affected firms’ value added and capital used for production. The baseline estimations show that financial development has boosted within-firm growth in India. Our findings also suggest that the impact of financial development on firms’ growth is heterogeneous across firms and industries. Credit expansion has a greater effect on firms that are initially larger, more productive or profitable. The effect of financial development is less heterogenous in sectors relying on external finance, where both medium-size and large firms have expanded more rapidly than small firms. These results are robust to various specifications that allow to control for other reforms taking place simultaneously, or for potential reverse causality.

Suggested Citation

  • Maria Bas & Antoine Berthou, 2012. "The Unequal Effects of Financial Development on Firms' Growth in India," Working Papers 2012-22, CEPII research center.
  • Handle: RePEc:cii:cepidt:2012-22
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    Cited by:

    1. Fatma Bouattour, 2015. "Financial constraints and export performance: Evidence from Brazilian micro-data," Post-Print hal-01267726, HAL.
    2. Meghana Ayyagari & Asli Demirguc-Kunt & Vojislav Maksimovic, 2017. "What Determines Entrepreneurial Outcomes in Emerging Markets? The Role of Initial Conditions," Review of Financial Studies, Society for Financial Studies, vol. 30(7), pages 2478-2522.
    3. Maria Bas, 2012. "Foreign ownership wage premium: Does financial health matter?," Working Papers 2012-24, CEPII research center.

    More about this item

    Keywords

    financial development; banking reforms; firm panel data; firm growth and capital investments;

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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