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

Author

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  • Owolabi, Oluwarotimi

    (Covenant 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.

Suggested Citation

  • Owolabi, Oluwarotimi & Pal, Sarmistha, 2011. "The Value of Business Networks in Emerging Economies: An Analysis of Firms' External Financing Opportunities," IZA Discussion Papers 5738, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp5738
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    References listed on IDEAS

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    Cited by:

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    3. Cho, Yoonyoung. & Kalomba, Davie. & Mobarak, Ahmed Mushfiq. & Orozco, Víctor., 2015. "Differences in the effects of vocational training on men and women : constraints on women and drop-out behaviour," ILO Working Papers 994874103402676, International Labour Organization.

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    More about this item

    Keywords

    agency costs; external firm financing; endogeneity; bank loans; business networks; transition economies;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General
    • P21 - Economic Systems - - Socialist Systems and Transition Economies - - - Planning, Coordination, and Reform

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