Banks, industrial relatedness and firms’ investments

Roberto Antonietti, Giulio Cainelli, Monica Ferrari and Stefania Tomasini

No 1402, Papers in Evolutionary Economic Geography (PEEG) from Utrecht University, Department of Human Geography and Spatial Planning, Group Economic Geography

Abstract: In this paper, we study whether industrial relatedness affects firms’ fixed investment behaviour, and whether this relationship is linked also to the operational and organizational proximity between banks and local economies. By estimating different specifications of a dynamic investment equation on an unbalanced panel of Italian manufacturing firms for the period 2000-2007, we find that industrial relatedness boosts fixed investments by lowering their sensitivity to cash flow. This occurs because in technologically related areas banks benefit from lower screening and monitoring costs, easier re-allocation of property rights, and higher likelihood of establishing extended credit relationships with firms. However, we find also that the positive effect of industrial relatedness on investments disappears as the functional distance between local branches and their headquarters increases: more hierarchical and less embedded banks find it more difficult to collect tacit information on inter-firm production and financial linkages at the local level and therefore reduce credit provision.

Keywords: error correction model; fixed investments; industrial relatedness; functional distance; operational proximity (search for similar items in EconPapers)
JEL-codes: G21 G34 L60 O12 R51 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2014-01, Revised 2014-01
New Economics Papers: this item is included in nep-ban, nep-cse and nep-geo
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