The Value of Business Networks in Emerging Economies: An Analysis of Firms' External Financing Opportunities
Oluwarotimi Ayokunnu Owolabi
Brunel University - Economics and Finance
University of Surrey; Institute for the Study of Labor (IZA)
IZA Discussion Paper No. 5738
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.
Number of Pages in PDF File: 48
Keywords: business networks, agency costs, external firm financing, bank loans, transition economies, endogeneity
JEL Classification: G21, G30, L14, M20, P21working papers series
Date posted: May 31, 2011
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