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informal finance: loans from family, friends, money lenders or other informal sources. It is possible that increasing reliance on retained profit represents not a decline in the institutions of formal finance, but an increase in the level of development – a maturation

  • of the financial sector and/or the business sector itself.

We explore these issues using regression analysis in Tables V.3 and V.4. Table V.3 analyzes the relationship between firm characteristics and financing shares for our benchmark market economies. Explanatory variables (characteristics) include ownership, export activity, location, size, and sector dummies. For consistency of interpretation across BEEPS surveys, bank financing includes state banks; the state financing that is separately identified is non-bank financing, e.g., grants and subsidies. The table shows, not surprisingly, that larger firms borrow more from banks and rely less on retained earnings; for bank financing, the coefficient on log employment is about 0.03, implying that an increase of employment from 50 to 500 would mean an increase in the share of bank financing of about 7 percentage points (=0.03*ln(10)). Foreign-owned firms rely less (about 10 percentage points) on bank financing and correspondingly more on retained earnings, presumably because foreign owners have “deep pockets”; the adjustments by foreign owners probably appear under retained earnings rather than equity because equity injections are made on an irregular/long-term basis. Exporters rely more on external financing (about 5 percentage points for bank borrowing and equity combined).

Table V.4 reports the same regression analysis using the 2005 BEEPS sample of TEs. In this initial formulation, we employ ownership dummies for new private and state-owned firms (the base category is privatized firms) but constrain the coefficients on explanatory variables to be the same across all types of firms. The results are qualitatively similar: larger firms rely more on external financing and less on retained earnings; foreign owned firms rely less on external financing, again presumably because their owners have deep pockets; exporters rely more on external financing. The ownership dummies are suggestive: state-owned firms, ceteris paribus, rely more on state financing and less on bank financing. But here we have a problem, because ceteris may not be paribus: it may


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