Financial Integration and Entrepreneurial Activity: Evidence from Foreign Bank Entry in Emerging Markets

53 Pages Posted: 9 Jul 2005

See all articles by Mariassunta Giannetti

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Steven Ongena

University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2005

Abstract

An extensive empirical literature has documented the positive growth effects of equity market liberalization. However, this line of research ignores the impact of financial integration on a category of firms crucial for economic development, i.e., the small entrepreneurial firms. This paper aims to fill this void. We employ a large panel containing almost 60,000 firm-year observations on listed and unlisted companies in Eastern European economies to assess the differential impact of foreign bank lending on firm growth and financing. Foreign lending stimulates growth in firm sales, assets, and leverage, but the effect is dampened for small firms. We also find that firms started during the transition period of 1989-1993 - arguably the most connected businesses - benefit least from foreign bank entry. This finding suggests that foreign banks can help mitigate connected lending problems and improve capital allocation.

Keywords: Foreign bank lending, emerging markets, competition, lending relationships

JEL Classification: G21, L11, L14

Suggested Citation

Giannetti, Mariassunta and Ongena, Steven R. G., Financial Integration and Entrepreneurial Activity: Evidence from Foreign Bank Entry in Emerging Markets (June 2005). ECB Working Paper No. 498, Available at SSRN: https://ssrn.com/abstract=726692 or http://dx.doi.org/10.2139/ssrn.726692

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Swedish House of Finance ( email )

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Steven R. G. Ongena

University of Zurich - Department Finance ( email )

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Swiss Finance Institute

c/o University of Geneva
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KU Leuven ( email )

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Leuven, Vlaams-Brabant 3000
Belgium

NTNU Business School ( email )

Norway

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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