Abstract
The purpose of this article is to empirically assess the relationship existing between local financial development and the growth of firms, with a special focus on cooperatives. Using Italian data, a multiplicative interaction model is specified, so as to allow the impact of local banking development to differ between cooperative and non-cooperative firms. The main finding is that although local banking development represents a determinant of firms’ growth, regardless of their legal structure, it plays a special role in boosting the growth of cooperatives. This result provides evidence in favor to the existence of an institutional complementarity relationship between the development of local banking institutions and cooperative firms.
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Notes
It is worth mentioning that in this literature a large number of contributions have focused on cross-country analysis (see Levine (1997) for a survey of the main studies), while fewer works have investigated within-country differences.
The horizon problem concerns the impossibility for partners to recoup the self-financed capital invested in the company when their expected tenure in the company is shorter than the time it takes for the stream of discounted net returns from the project to equal the initial cost of the investment.
According to Pejovich (1992), two critical variables determining the availability of bank loans are cooperators’ time horizon and the length of bank credit. Members of a cooperative firm would prefer to obtain bank loans when the length of the loan is longer than their time horizon with the firm. By contrast, banks would prefer to extend loans in the opposite case, that is when the length of the loan is shorter than the time horizon of members. Consequently, cooperatives might not be able to obtain bank credit due to the mismatch between members’ time horizon and the length of the bank loan.
An applicable formal model of credit market failures has been proposed by Banerjee and Newman (1993).
However, Zamagni (2005) argues that the evidence alone does not suffice to invalidate an analytically proved theory. Therefore, future research on cooperation should devote a great deal of effort to promote the making of what he calls an “economic-civil theory of cooperation.”
For a discussion of the European reforms introduced in the 1990s—as the 1991 Belgian Law, the 1992 Italian and French Laws, the 1992 Catalonian Law, and the 1993 Basques Law—see the volume edited by Monzon et al. (1996).
Notice that in this example the system of the rule of law is a governance mechanism, while its justice is an attribute, a characteristic of this governance mechanism.
Amable et al. (2005) argue that the type of financial relationship between the firm and the capital owner or the financial market will set a certain constraint on firm’s profitability, which will partly determine firm’s survival probability. This will in turn shape both management and union strategies, hence influencing the outcome of the bargaining between these two actors.
The Italian corporate law disciplines firms’ legal structures according to the principle of juristic personality. All legal forms recognized by the Italian lawmaker are present in the Capitalia database, under the classification here presented. A first typology is that of sole trader, a business entity having no separate existence from its owner. Basically, under this legal structure a person does business in his own name and under unlimited liability. Second, have partnerships, unincorporated businesses without juristic personality, since their legal personality is not separated from that of their members. These enterprises normally operate under the unlimited liability of partners, although other forms (i.e., societa’ in accomandita semplice) have evolved in which only certain members have unlimited liability, while the others have limited liability. A third legal form is that of corporations, incorporated businesses, which are legal entities effectively recognized as a (fictious) person by law. These enterprises are, in other words, juristic persons and operate under limited liability. Fourth, have cooperative firms, hinging on the principle of mutual aid, which have legal personality and can operate under both limited and unlimited liability. Finally, Capitalia classifies the typologies established lately from the classical forms, so far, presented under the label “other legal structures,” among which figure the s.r.l. unipersonale (an incorporated company having a single owner), societa’ di professionisti (professionals’ company), and societa’ europea (European company).
In this analytical framework, what matters are cooperative firms as a whole, that is as an organizational form having traits that, on one hand, still render it mostly dependent upon banking institutions and, on the other hand, make the bank–firm link complex. Thus, given the purpose of the empirical investigation, possible differentiations in the financial structure of these firms are left aside. Yet, this latter aspect deserves further in depth inquiry, on both theoretical and empirical grounds, in future research.
See Brambol et al. (2006) for an analysis of multiplicative interaction models.
It is worth noting that it has been preferred to control for the sensitivity of sales to inflation, even though in Italy inflation rates are rather contained.
Although Gibrat’s law of proportionate effects (1931) states that firm growth is independent of size, empirical research has not reached unequivocal conclusions. Indeed, while most studies rejected the model (Tschoegl 1983; Evans 1987; Dunne et al. 1989; Dunne et al. 1994; Mata 1994; Weiss 1998; Audretsch et al. 1999; Becchetti and Trovato 2002), others found evidence in favor to Gibrat’s law (Chen et al. 1985; Kumar 1985; Acs and Audretsch 1990; Wagner 1992; Dìaz-Hermelo and Vassolo 2004). In between these conclusions, Lotti et al. (2003) found that in some Italian manufacturing industries the behavior of Gibrat’s law depends on the life cycle of the firm. In particular, the law does not hold in the first year following start-up, when smaller entrants grow faster in order to achieve a size that enhances their survival likelihood. Thereafter, the law is not rejected, as smaller and larger entrants are not found to follow different growth patterns.
Regarding the relationship between firm age and growth, the general pattern suggested by previous research is that young firms are more likely to grow faster (see, for instance, Glancey 1998; Almus and Nerlinger 1999; Wijewardena et al. 1999; Becchetti and Trovato 2002; Davidsson et al. 2002; Niskanen and Niskanen 2005)
The impact of cash flow on firm growth varies with the availability of external sources of financing, as the latter relax the link between growth and internal finance (Carpenter and Petersen 2002).
This classification of the industrial sectors has been proposed by Pavitt (1984).
The correlation matrix for the variables used in the estimations is reported in the Appendix.
An exception to this is represented by the variable COOP and by territorial and industrial dummies.
Yet, the intention for future research is to dispose of a much greater amount of observations on cooperatives.
Regarding the composition of the sub-sample of cooperatives across the surveys considered in the analysis—spanning the triennia 1995–1997, 1998–2000, and 2001–2003—61% firms are present in one wave, 31.6% are included for 6 years, hence in two surveys, and 7.4% firms appear in all three waves. As explained by Attilio Pasetto—in charge for Capitalia’s Indagine sulle imprese manifatturiere—in order to keep in each wave a significant quota of sample units belonging to the preceding surveys, and also to supplement the sample with new units, Capitalia uses the criterion of partial re-sampling of firms (rotation panel design). So that, differences in the firms appearing in the surveys are mainly due to the sampling method adopted. Moreover, as far as non-responding units are concerned, these include firms that did not adhere to initiatives subsequent to the first one, those that run out of business, those whose number of employees fell below 11, and those not belonging to the manufacturing industry anymore.
Following Servèn (2003), the criterion used to operate the outliers correction is to consider as outliers all observations for which any of the variables lies beyond 10 standard deviation away from the mean. It is worth mentioning that sole traders have been excluded from the sample, as the intention is to focus on enterprises. As regards the category “other legal structures,” this has not been considered since it includes very heterogeneous business types (see footnote 10).
The variable PAV2 is not excluded from MOD3, even if not statistically significant, since—as an anonymous referee pointed out—PAV1, PAV2, and PAV3 are to be intended as an integrated set of variables.
Recently, also Fagiolo and Luzzi (2006) found that liquidity constrained firms are those that grow persistently more. The authors show that small and quite dynamic firms are capable to perform well, despite being cash-constrained.
It is important to clarify that it would be erroneous to argue that the more banks are developed, the more firms tend to structure themselves as cooperatives, since this would imply to regard the degree of development of financial intermediaries as driving individuals’ organizational choice. And, indeed, the institutional complementarity approach does not conflict with this, since one of its major implications is that the presence of institutional complementarity does not necessarily lead to the selection of a Pareto improving institutional arrangement. In fact, being a dynamic approach admitting multiple equilibria, institutional complementarity—as mentioned in Sect. 3—does not rule out that the prevailing institutional arrangements may be Pareto sub-optimal, as well as Pareto non-rankable. This is so because, due to their bounded rationality in perception and choice, agents cannot strategically coordinate their choices across domains, even if they participate in them simultaneously (Aoki 2001).
The outliers correction for INV has been operated after having estimated the models 1–3. Results are unchanged when these models have been re-estimated after this correction.
It has been argued that employment is a more informative indicator of organizational complexity than sales, and may be preferable if the focus is on the managerial implications of growth (Greiner 1972; Churchill and Lewis 1983). Moreover, some scholars have claimed that for resource- and knowledge-based views of the firm, which consider firms as bundle of resources, growth analysis should focus on the accumulation of resources, such as employees (Penrose 1959; Kogut and Zander 1992).
These figures regard the models from 3 to 7.
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Acknowledgments
In writing this version I benefited from the comments of Geoffrey M. Hodgson, Avinash K. Dixit, Douglass C. North, Giovanni Dosi, Jesse M. Fried, Francesco Trivieri, the participants to the European School on New Institutional Economics held in Cargese on 21–25 May 2007, and two anonymous referees. I thank Attilio Pasetto from Capitalia for his kind elucidations. I am also grateful to Mariarosaria Agostino, Elena Granaglia, Rosanna Nisticò and the participants to the Centre for Research in Institutional Economics Workshop held at the University of Hertfordshire on 23–24 January 2007, for their valuable comments and suggestions on earlier versions of this article. Of course, all remaining errors and omissions are mine.
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Gagliardi, F. Financial development and the growth of cooperative firms. Small Bus Econ 32, 439–464 (2009). https://doi.org/10.1007/s11187-007-9080-z
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DOI: https://doi.org/10.1007/s11187-007-9080-z