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The Unequal Effects of Financial Development on Firms' Growth in India

Maria Bas and Antoine Berthou ()

Working Papers from CEPII research center

Abstract: This paper investigates the microeconomic effects of financial development on economic growth. The increased availability of credit is usually expected to improve firms’ growth due to the elimination of credit constraints. We investigate this question using a survey of Indian firms in the manufacturing industry during the period 1997-2006, in a context of rapid economic growth and underlying structural changes. We examine how changes in the level credit over GDP in Indian States affected firms’ value added and capital used for production. The baseline estimations show that financial development has boosted within-firm growth in India. Our findings also suggest that the impact of financial development on firms’ growth is heterogeneous across firms and industries. Credit expansion has a greater effect on firms that are initially larger, more productive or profitable. The effect of financial development is less heterogenous in sectors relying on external finance, where both medium-size and large firms have expanded more rapidly than small firms. These results are robust to various specifications that allow to control for other reforms taking place simultaneously, or for potential reverse causality.

Keywords: financial development; banking reforms; firm panel data; firm growth and capital investments (search for similar items in EconPapers)
JEL-codes: G21 O16 (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-dev, nep-eff, nep-ent, nep-fdg and nep-mfd
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