Banking Competition, Financial Dependence and Productivity Growth in Europe
International Economics, Forthcoming
28 Pages Posted: 23 Feb 2015 Last revised: 10 Sep 2016
Date Written: February 8, 2016
This study empirically analyses the links between banking competition and manufacturing productivity growth for a sample of 10 European countries during the period 1999-2009. To test this relationship, which from a theoretical point of view is unclear, we use a difference-in-difference methodology similar to the one proposed by Rajan and Zingales (1998). We find that the total factor productivity of the most financially dependent industries grows more slowly in economies where banking competition is fiercer. We explain this result with the fact that bank market power, i.e., low competition, would promote relationship banking, as theoretically argued, for example, by Petersen and Rajan (1995). Relationship banking would allow banks to reduce information asymmetries, which would benefit small and/or young firms, improving the allocation of funds. Banks may select more of the best firms, which would increase total factor productivity of the industries that are more dependent on external finance.
Keywords: bank competition, total factor productivity, economic growth, industrial growth
JEL Classification: D4, G21, L11
Suggested Citation: Suggested Citation