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The focus of this paper is on restructuring and growth, however, and so we are particularly interested in how this is enabled, or not, by financial institutions. We therefore focus on the structure of financing of firms.

Table V.1 presents a snapshot of the sources of finance for fixed investment by firms in the BEEPS surveys in 2004-05. By far the largest source of financing is retained earnings, in all regions. This is a standard finding in the literature (see e.g., Mayer (1988, 1990) for an early discussion). More significant are the cross-country differences. West Germany (I) stands out from the cohesion countries (II) as country where dependence on internal financing is somewhat lower, though the differences are not huge: roughly 50% of total financing in Germany is via retained earnings, vs. 60% in the cohesion countries. The difference is due to formal capital markets: not just bank financing (23% vs. 20%) but equity offers (10% vs. 3%). The EU8 members (III) resemble the cohesion countries in both the reliance on retained earnings and on formal capital markets (though division between equity offers and bank financing puts more weight on the former). Reliance on retained earnings and on capital markets is clearly related to level of income and economic development: the former increases, and the latter decreases, as we move from the richest to the poorest country groups. Interestingly, the role of state bank financing is small and if anything, smaller in the transition economies than in the developed market economies. State banks do not appear to be a major conduit for the soft budget constraint, at least for most firms.

More surprising is the time trend in the TEs. Table V.2 shows that the transition economies have not been converging to levels of reliance on retained earnings that are observed in the mature EU economies; on the country, in all groups of transition countries, firms were on average more reliant on retained earnings in 2005 than in 1999. The data in the table do not suggest that formal capital markets have been shrinking in TEs; as the simple means in the table show, reliance on bank and equity financing has been fairly stable over this period. (Bank financing from state banks cannot be separately identified in 1999, but the figures for 2002 are small and slightly below those reported in Table V.1 for 2005.) The biggest change has apparently been a move away from


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