Investment, Efficiency, and Credit Rationing: Evidence from Hungarian Panel Data

Relying upon a rich and unique panel of Hungarian firms over 7 years, from 1992 up to 1998, this paper estimates simultaneously TFP, Total Factor Productivity, identified as efficiency, and the parameters of a model where investment depends upon internal funds, wages, and sales, as in Prasnikar J. and Svejnar J. (2000). It shows that while real investment is higher in foreign firms, the improvement in efficiency due to investment is significantly higher in Hungarian domestic firms. We test the possibility that this higher than average foreign investment may exacerbate other firms credit constraints by crowding them out of domestic capital markets. Of course one must control for that foreign firms may simply be more profitable and have access to more collateral, hence be a better investment for lending institutions. All firms (foreign, private and domestically owned, and State-owned) are credit rationed, including foreign firms. State-owned firms do not have an investment behaviour compatible with profit maximisation, a result which emphasises the soft budget constraint persistence (but not through the providing with soft credit). For these firms, wages increase together with investment.