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The Value of Business Networks in Emerging Economies: An Analysis of Firms' External Financing Opportunities

Oluwarotimi Owolabi () and Sarmistha Pal
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Oluwarotimi Owolabi: Covenant University

No 5738, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The paper argues that networked firms are likely to have an advantage in securing external finance in countries with weak legal and judicial institutions since it helps financial institutions to minimize the underlying agency costs of lending. An analysis of recent BEEPS data from fifteen Central and Eastern European (CEE) countries lends some support to this hypothesis. Even after controlling for other factors, firms affiliated to business associations are more likely to secure bank finance. Importance of being associated with business networks is particularly evident among firms who borrow from private domestic and foreign banks, as these new banks attempt to minimize costs of adverse selection. Networking however discriminates against the small and medium sized firms' access to bank loans in the CEE regions. Results are robust in both single cross-section and panel data analyses.

Keywords: agency costs; external firm financing; endogeneity; bank loans; business networks; transition economies (search for similar items in EconPapers)
JEL-codes: G21 G30 L14 M20 P21 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2011-05
New Economics Papers: this item is included in nep-cfn, nep-hme, nep-net and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published - published as 'Does business networking boost firms' external financing opportunities? Evidence from Central and Eastern Europe' in: Applied Financial Economics, 2013, 23 (5), 415-432

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