Government connections and credit access around the world: Evidence from discouraged borrowers

Abstract

Motivated by the international business literature that examines the interactions between organizations, corruption, and political forces, we examine whether and how government connections affect small and medium-sized enterprises’ (SMEs) credit access around the world. Using a sample of SMEs across 30 developing countries, we show that SMEs with government connections are significantly less likely to be discouraged from approaching banks for a loan as compared to SMEs without such connections. However, connected SMEs do not receive preferential lending from banks. Moreover, the nature of this effect depends on the institutional setting. Specifically, the effect becomes stronger in countries with high levels of corruption, suggesting that government connections are substitutes for poorly functioning formal institutions. Our findings have important implications for policies targeted at reducing corruption, improving access to financing, facilitating entrepreneurship, and attracting foreign investment.

Résumé

Motivés par la littérature en international business qui examine les interactions entre les organisations, la corruption et les forces politiques, nous étudions si et comment les connexions gouvernementales affectent l’accès au crédit des petites et moyennes entreprises (PME) dans le monde. En utilisant un échantillon de PME dans 30 pays en développement, nous montrons que les PME ayant des relations avec le gouvernement sont beaucoup moins susceptibles d’être découragées d’approcher des banques pour un prêt par rapport aux PME sans connexions. Cependant, les PME connectées ne bénéficient pas de prêts préférentiels de la part des banques. De plus, la nature de cet effet dépend du cadre institutionnel. Plus précisément, l’effet devient plus fort dans les pays où le niveau de corruption est élevé, ce qui suggère que les relations gouvernementales sont des substituts aux institutions formelles qui fonctionnent mal. Nos résultats ont des implications importantes pour les politiques visant à réduire la corruption, à améliorer l’accès au financement, à faciliter l’entrepreneuriat et à attirer les investissements étrangers.

Resumen

Motivados por la literatura de negocios internacionales que examina las interacciones entre las organizaciones, la corrupción, y las fuerzas políticas, examinamos si las conexiones gubernamentales afectan el acceso a crédito de las empresas pequeñas y medianas (pymes) alrededor del mundo. Usando una muestra de pymes en 30 países en vía de desarrollo, mostramos que las pymes con conexiones con los gobiernos son significativamente menos propensas a ser desalentadas a acercarse a los bancos para un prestamo en comparación con las pymes sin conexiones. Sin embargo, las pymes conectadas no reciben préstamos preferenciales de los bancos. Por otra parte, la naturaleza de este efecto depende del entorno institucional. Específicamente, el efecto se hace más fuerte en países con mayores niveles de corrupción, lo que sugiere que las conexiones con el gobierno son substitutos de instituciones formales que funcionan mal. Nuestros hallazgos tienen implicaciones importantes para políticas destinadas a reducir la corrupción, mejorar el acceso a financiación, facilitar el emprendimiento, y atraer inversionistas extranjeros.

Resumo

Motivados pela literatura sobre negócios internacionais que examina as interações entre organizações, corrupção e forças políticas, examinamos se, e como conexões governamentais afetam o acesso a crédito de pequenas e médias empresas (SMEs) ao redor do o mundo. Usando uma amostra de SMEs em 30 países em desenvolvimento, mostramos que SMEs com conexões governamentais são significativamente menos propensas a serem desencorajadas a pedir empréstimos a bancos do que SMEs sem conexões. No entanto, SMEs conectadas não recebem empréstimos preferenciais de bancos. Além disso, a natureza desse efeito depende do ambiente institucional. Especificamente, o efeito se torna mais forte em países com altos níveis de corrupção, sugerindo que as conexões governamentais substituem instituições formais disfuncionais. Nossas descobertas têm implicações importantes para políticas que objetivam reduzir corrupção, melhorar acesso a financiamento, facilitar o empreendedorismo, e atrair investimentos estrangeiros.

摘要

受组织、腐败和政治力量之间相互作用的国际商务文献的启发, 我们研究了政府关系是否以及如何影响世界各地中小企业(SME)的信贷获取。通过对30个发展中国家的SME的抽样研究, 我们发现, 与政府有关系的SME与没有关系的SME相比, 不大可能不被鼓励与银行接触以寻求贷款。然而, 有关系的SME不会从银行获得优惠贷款。而且, 这种影响的性质取决于制度环境。特别是, 在腐败程度高的国家, 这种影响变得更加强烈, 表明政府关系可以代替运转不佳的正规制度。我们的发现对旨在减少腐败, 改善融资渠道, 促进创业精神, 以及吸引外国投资的政策具有重要启示。

This is a preview of subscription content, log in to check access.

References

  1. Ang, Y. Y., & Jia, N. 2014. Perverse complementarity: Political connections and the use of courts among private firms in China. Journal of Politics, 76(2): 318–332.

    Google Scholar 

  2. Ault, J. K. 2016. An institutional perspective on the social outcome of entrepreneurship: Commercial microfinance and inclusive markets. Journal of International Business Studies, 47(8): 951–967.

    Google Scholar 

  3. Berg, T. 2018. Got rejected? Real effects of not getting a loan. Review of Financial Studies, 31(12): 4912–4957.

    Google Scholar 

  4. Berger, A. N., & Udell, G. F. 1998. The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle. Journal of Banking & Finance, 22(6–8): 613–673.

    Google Scholar 

  5. Bonnet, J., Cieply, S., & Dejardin, M. 2016. Credit rationing or overlending? An exploration into financing imperfection. Applied Economics, 48(57): 5563–5580.

    Google Scholar 

  6. Boubakri, N., Mansi, S. A., & Saffar, W. 2013. Political institutions, connectedness, and corporate risk-taking. Journal of International Business Studies, 44(3): 195–215.

    Google Scholar 

  7. Brockman, P., Rui, O. M., & Zou, H. 2013. Institutions and the performance of politically connected M&As. Journal of International Business Studies, 44(8): 833–852.

    Google Scholar 

  8. Brown, R., Liñares-Zegarra, J. M., & Wilson, J. O. 2018. An empirical examination of discouraged borrowers in the UK. SSRN Working Paper.

  9. Chen, C. J., Ding, Y., & Kim, C. F. 2010. High-level politically connected firms, corruption, and analyst forecast accuracy around the world. Journal of International Business Studies, 41(9): 1505–1524.

    Google Scholar 

  10. Cowling, M., Liu, W., Minniti, M., & Zhang, N. 2016. UK credit and discouragement during the GFC. Small Business Economics, 47(4): 1049–1074.

    Google Scholar 

  11. Duchin, R., & Sosyura, D. 2012. The Politics of government investment. Journal of Financial Economics, 106(1): 24–48.

    Google Scholar 

  12. Fung, A. 2006. Empowered participation: Reinventing urban democracy. Princeton: Princeton University Press.

    Google Scholar 

  13. Heckman, J. J. 1979. Statistical models for discrete panel data. Chicago: Department of Economics and Graduate School of Business, University of Chicago.

    Google Scholar 

  14. Hung, M., Kim, Y., & Li, S. 2018. Political connections and voluntary disclosure: Evidence from around the world. Journal of International Business Studies, 49(3): 272–302.

    Google Scholar 

  15. International Monetary Fund. 2000. Transition economies: An IMF perspective on progress and prospects. Accessed August 5, 2019, from https://www.imf.org/external/np/exr/ib/2000/110300.htm.

  16. Khwaja, A. I., & Mian, A. 2005. Do lenders favor politically connected firms? Rent provision in an emerging financial market. Quarterly Journal of Economics, 120(4): 1371–1411.

    Google Scholar 

  17. Kon, Y., & Storey, D. J. 2003. A theory of discouraged borrowers. Small Business Economics, 21(1): 37–49.

    Google Scholar 

  18. Levenson, A. R., & Willard, K. L. 2000. Do firms get the financing they want? Measuring credit rationing experienced by small businesses in the US. Small Business Economics, 14(2): 83–94.

    Google Scholar 

  19. McMillan, J., & Woodruff, C. 2002. The central role of entrepreneurs in transition economies. Journal of Economic Perspectives, 16(3): 153–170.

    Google Scholar 

  20. Meyer, J. W., & Scott, W. R. 1983. Organizational environments: Ritual and rationality. Beverly Hills: Sage.

    Google Scholar 

  21. Meyer, K. E., van Witteloostuijn, A., & Beugelsdijk, S. 2017. What’s in a p? Reassessing best practices for conducting and reporting hypothesis-testing research. Journal of International Business Studies, 48(5): 535–551.

    Google Scholar 

  22. Michelacci, C., & Silva, O. 2007. Why so many local entrepreneurs? Review of Economics and Statistics, 89(4): 615–633.

    Google Scholar 

  23. Michelson, E. 2006. Connected contention: Social resources and petitioning the state in rural China. SSRN Working Paper.

  24. North, D. 1990. Institutions, institutional change and economic performance. Cambridge: Cambridge University Press.

    Google Scholar 

  25. OECD. 2014. Policy brief on access to business start-up finance for inclusive entrepreneurship. Accessed March 4, 2019, from https://www.oecd.org/cfe/leed/Finacing%20inclusive%20entrepreneurship%20policy%20brief%20EN.pdf.

  26. Peterson, M. F. 2016. A culture theory commentary on Meyer and Peng’s theoretical probe into Central and Eastern Europe. Journal of International Business Studies, 47(1): 33–43.

    Google Scholar 

  27. Sojli, E., & Tham, W. W. 2017. Foreign political connections. Journal of International Business Studies, 48(2): 244–266.

    Google Scholar 

  28. Svejnar, J. 2002. Transition economies: Performance and challenges. Journal of Economic Perspectives, 16(1): 3–28.

    Google Scholar 

  29. Zaheer, S. 1995. Overcoming the liability of foreignness. Academy of Management Journal, 38(2): 341–363.

    Google Scholar 

Download references

Acknowledgements

We are grateful to Arjen van Witteloostuijn (the Area Editor) and four anonymous reviewers for many helpful comments and suggestions that have significantly improved the paper. We also thank Ralph De Haas and Ben Sila for continuous support and helpful advice on the project. Shusen Qi acknowledges financial support from the National Natural Science Foundation of China (71903164, 71790601), the Social Science Foundation of Fujian Province (FJ2019B140), and Fundamental Research Funds for the Central Universities (20720181028). The usual disclaimer applies.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Duc Duy Nguyen.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Accepted by Arjen van Witteloostuijn, Area Editor, 5 May 2020. This article has been with the authors for two revisions.

Electronic supplementary material

Below is the link to the electronic supplementary material.

Supplementary material 1 (DOCX 107 kb)

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Qi, S., Nguyen, D.D. Government connections and credit access around the world: Evidence from discouraged borrowers. J Int Bus Stud (2020). https://doi.org/10.1057/s41267-020-00341-x

Download citation

Keywords

  • government connections
  • small-and-medium-sized enterprises (SMEs)
  • access to finance
  • discouraged borrowers
  • institutional theory
  • corruption