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Financial Integration and Entrepreneurial Activity: Evidence from Foreign Bank Entry in Emerging Markets

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  • Ongena, Steven
  • Giannetti, Mariassunta

Abstract

An extensive empirical literature has documented the positive growth effects of equity market liberalization. However, this line of research ignores the impact of financial integration on a category of firms crucial for economic development, i.e. the small entrepreneurial firms. This paper aims to fill this void. We employ a large panel containing almost 60,000 firm?year observations on listed and unlisted companies in Eastern European economies to assess the differential impact of foreign bank lending on firm growth and financing. Foreign lending stimulates growth in firm sales, assets, and leverage, but the effect is dampened for small firms. We also find that the most connected businesses benefit least from foreign bank entry. This finding suggests that foreign banks can help mitigate connected lending problems and improve capital allocation.

Suggested Citation

  • Ongena, Steven & Giannetti, Mariassunta, 2005. "Financial Integration and Entrepreneurial Activity: Evidence from Foreign Bank Entry in Emerging Markets," CEPR Discussion Papers 5151, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5151
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    More about this item

    Keywords

    Foreign bank lending; Emerging markets; Competition; Lending relationships;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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