Anna Maria FERRAGINA | Progetti

FIRMS¿ EXTERNAL AND INTERNAL FINANCIAL CONSTRAINTS, PRODUCTIVITY AND SIZE. EVIDENCE FROM ITALY AND MOROCCO

There are several arguments showing that finance fosters growth and firm-level productivity. Financially constrained firms have to give up on profitable investment opportunities which may reduce their productivity. Furthermore, they see their innovation and R&D investment highly reduced as R&D projects, because of their intangible nature and high risk, are not easily funded by the banks. There is a scant literature exploiting micro level data which has analysed the links between financial factors and firm productivity. We contribute to this literature by exploring related issues for Italy and Morocco. We develop a structural approach where we estimate a production function equation that directly includes our measure of financial constraints as a regressor while allowing productivity to evolve as a first-order autoregressive process. We explore two main questions. First, to what extent financial constraints act as directly conditioning factors and have an impact on firm productivity?How the sensitivity to external and internal financial sources and constraints is robust across different size classes thresholds? To answer these questions a clear distinction between firm, industry, and region-specific factors must be established to be able to assess the importance of firm-specific determinants of productivity. Our paper contributes to the literature in four directions. In the literature on finance and productivity the role of firm size is not adequately explored. Our contribution hence lies mainly on investigating this fundamental aspect given a documented financial pressure typical of SMEs in many countries. The focus is on the difference in the impact of financial pressure on firm productivity according to firm size. In our theoretical setup, small firms should be more sensitive as large ones should have easier access to credit. We also contribute to the most recent literature on a few other fundamental aspects. First, we deepen the analysis carried out by previous studies comparing several estimation methods of productivity. To test the hypothesis that an increased availability of financial resources can raise firms’ productivity, in a first step we use two different approaches to estimate TFP: Levinshon and Petrin and Olley and Pakes. Furthermore, our contribution allows to take into account that the variables included in the productivity equations are likely to be endogenous. There is considerable difficulty in providing rigorous evidence of a causal link between access to finance and firm performance. Any firm-level correlation between firm performance and access to finance is subject to omitted variables bias or reverse causation since banks are expected to lend to firms with high performance and prospects. Hence, our contribution allows to take into account that the variables included in the productivity equations are likely to be endogenous. Taking into account the endogeneity of the financial variables is crucial and only few otherstudies have already addressed these issues (e.g. Nucci et al., 2005; Coricelli et al., 2012; Chen and Guariglia, 2013). Following these contributions, in our analysis we show the robustness of the results we get by comparing GMM system estimations with the estimations of Fixed effect model, which does not consider the role of endogeneity and of unobservable variables. Besides, while the majority of previous studies has focused on the links between the degree of external financial constraints faced by firms and their productivity (see for instance Butler et al., 2010) following Chen and Guargiglia, (2013), we have considered in our productivity regressions also proxies for the availability of internal finance. We investigate the relationship between different proxies of a firm’s financial constraints and productivity using four indicators (a proxy for external funding such as bank indebtedness, and three different variables for internal sources: profit margin, liquidity, coverage).