Bank Credit and Business Networks
Asim Ijaz Khwaja
Harvard University - Harvard Kennedy School (HKS)
Atif R. Mian
Princeton University - Department of Economics; Princeton University - Woodrow Wilson School of Public and International Affairs; NBER
State Bank of Pakistan
February 17, 2011
HKS Working Paper No. RWP11-017
We construct the topology of business networks across the population of firms in an emerging economy, Pakistan, and estimate the value that membership in large yet diffuse networks brings in terms of access to bank credit and improving financial viability. We link two firms if they have a common director. The resulting topology includes a "giant network" that is order of magnitudes larger than the second largest network. While it displays "small world" properties and comprises 5 percent of all firms, it accesses two-thirds of all bank credit. We estimate the value of joining this giant network by exploiting "incidental" entry and exit of firms over time. Membership increases total external financing by 16.6 percent, reduces the propensity to enter financial distress by 9.5 percent, and better insures firms against industry and location shocks. Firms that join improve financial access by borrowing more from new lenders, particularly those already lending to their (new) giant-network neighbors. Network benefits also depend critically on where a firm connects to in the network and on the firm's pre-existing strength.
Number of Pages in PDF File: 53
Keywords: Business Networks, Financial Development, Bank Credit, Network Analysis
JEL Classification: L14, O16, D85, D02working papers series
Date posted: February 19, 2011 ; Last revised: March 15, 2011
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