Can Firms with Political Connections Borrow More Than Those Without? Evidence from Firm-Level Data for Indonesia

Using a unique firm-level dataset for the manufacturing sector in Indonesia, we examine how firms' political and economic connections affect their access to finance. We determine individual firms' political connections by identifying whether the government owns shares in the firm, whether politicians are on its board of directors, and whether highly-ranked managers personally know any politicians. We find that politically connected firms are more likely to be able to borrow from state-owned banks. Moreover, being connected to the government raises the probability that a firm can receive the full loan amount it applied for. The improvement in access to finance from political connections is more prominent for SMEs than for large firms. Furthermore, such improvement mostly comes from personal connections with politicians rather than more formal connections measured by the government ownershipor politicians on the board of directors.