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The Role of Long-term Loans for Economic Development: Empirical Evidence in Japan, Korea, and Taiwan


  • Fukuda, Shin-ichi


The purpose of this paper is to investigate whether long-term funds had a positive impact on investment in Japan, Korea, and Taiwan. When there exists a possibility of a liquidity shortage, the firm's investment decision tends to be conservative. Thus, to the extent that the long-term debt makes the liquidity shortage less likely outcome, long-tern loans can have a positive impact on investment. In the first part of this paper, we estimate Tobin's Q type investment functions of Japanese firms for two different sample periods. In 1972-84, we find that the long-term loan ratio had an additional positive effect on investment. However, in 1985-96, we cannot find that a higher ratio of long-term loans increased the Japanese firm's investment. The result indicates that the size of long-term loans had a great influence on the firm's investment only at the early stage of the financial market development in Japan. In the second part of this paper, we estimate investment functions of Korean and Taiwanese firms in the late 1990s. In the late 1990s, Korea experienced a serious crisis, while the decline of Taiwanese economy was relatively moderate. We, however, find that the long-term debt ratio had a significantly positive impact on the investment in both countries. The result indicates that long-term funds might have mitigated the decline of investment regardless of the magnitude of the crisis.

Suggested Citation

  • Fukuda, Shin-ichi, 2001. "The Role of Long-term Loans for Economic Development: Empirical Evidence in Japan, Korea, and Taiwan," CEI Working Paper Series 2001-13, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hit:hitcei:2001-13
    Note: This paper was presented at the conference on Designing Financial Systems in East Asia and Japan: Toward a Twenty-First Century Paradigm. This two-day conference was co-organized by the International Monetary Fund and the CEI. It was held during September 24-25, 2001 at Hitotsubashi Memorial Hall in Tokyo, Japan. A select group of academics, researchers and policy makers from around the world gathered to examine the timely issue of how the financial systems and corporate governance in East Asia and Japan should be redesigned in order to achieve sustainable economic development. The conference included six sessions with 17 papers. All the presented papers were added to the CEI series of working papers. The series, as well as the contents of the conference, can be reached at, September 12, 2001

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    References listed on IDEAS

    1. Valerie R. Bencivenga & Bruce D. Smith, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 195-209.
    2. Roubini, Nouriel & Sala-i-Martin, Xavier, 1992. "Financial repression and economic growth," Journal of Development Economics, Elsevier, vol. 39(1), pages 5-30, July.
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    Cited by:

    1. Ogawa, Kazuo & Sterken, Elmer & Tokutsu, Ichiro, 2007. "Why do Japanese firms prefer multiple bank relationship? Some evidence from firm-level data," Economic Systems, Elsevier, vol. 31(1), pages 49-70, March.

    More about this item


    Long-term Loans; Economic Growth; Tobin's Q;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation


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