In a recent paper, George Clarke, Gregory Kisunko and I use data from firms in Eastern Europe, a region that was especially hard hit by the global financial crisis, to study which firms survived and how they did it. Our first data source is a panel of firms from 23 countries that were interviewed in 2002, 2005, and 2008-9 as part of the Business Environment and Enterprise Performance Surveys (BEEPS). It allows us to document how financial constraints evolved over time and to see how firm and country characteristics affected those constraints during the crisis. The second dataset, from the Financial Crisis Surveys (FCS) that were conducted as follow-ups to the BEEPS in six countries (Bulgaria, Hungary, Latvia, Lithuania, Romania and Turkey) in 2009, allows us to look at how changes in access to financing affected firm survival rates during the crisis.
Between 70 and 80 percent of managers said that the biggest problem that their firm faced during the crisis was a drop in demand, and the FCS indicate that about 12% of firms did not survive the crisis. Regression results show that large firms were 5 percentage points more likely to survive than small ones and a ten-year-old firm was 3 percentage points more likely to survive than a new firm. These effects are large relative to a 12% failure rate. Those regressions also confirm that firms with access to external finance were substantially more likely than others to weather the decline in demand: controlling for size and age, firms that had an existing relationship with a bank in the form of a loan or an overdraft facility were 3 percentage points more likely to survive the crisis through 2009 than those without. Including the financial access variables in the regression reduces the size and significance of the coefficient for the firm size variable, indicating that one reason that large firms fared better in terms of survival is that they had better access to finance than smaller firms did.
So far, no great surprises. Large, well-established firms with access to external finance were better able to survive the crisis than others. But that tells only part of the story. Perceived financial constraints were worsening at a swifter rate for this group than for others during the crisis. Controlling for a host of firm and country characteristics in the same regression, large firms were about 20 percent more likely to report that access to finance was ‘no obstacle’ to their operations in 2005 than small firms were. In 2009, large firms were only slightly more likely to report that they were unconstrained by finance, and the share reporting that finance was no obstacle was less than 30 percent for both groups. In 2005, 45 percent of large firms reported finance was not an obstacle.
At first blush, it may seem surprising that the changes in reported financial constraints were more severe for large firms than others during the crisis. Their size and age makes them more transparent for lenders to evaluate, often they have more and better collateral to pledge, and they are more likely to have long-standing relationships with multiple banks, all of which could help them obtain or retain external finance to a greater extent than other firms during the crisis. However, data on loan applications in 2008-9 and changes in financial status from 2005 to 2008-9 clearly show the strain on large firms as they scrambled to find enough external finance to help them get through the crisis.
While all firms were more likely to apply for loans in 2008-9 than in 2005 (or 2002), the increase was especially pronounced for large firms (Figure 1). Whereas 39.2% of large firms applied for a loan in the 2005 survey, 71.8% did so in the 2008-9 survey. For small firms, the share that applied for loans scarcely increased over the two surveys (from 25.8% to 26.7%). This does not necessarily imply that small firms were less affected by the drop in demand that accompanied the crisis than large ones. Both groups were affected, but large firms likely felt that their likelihood of obtaining credit in 2008-9 was reasonably high. By contrast, small firms, almost a third of which reported being discouraged from applying for loans in 2005 because of procedural hurdles and their belief that their applications were likely to be rejected, remained much less likely to seek bank loans in 2008-9. If they were discouraged in 2005 about their prospects of receiving a loan, how much more discouraged were they likely to be in the midst of a banking crisis?
Large firms showed less persistence in their credit needs during the crisis than small firms. Only half that reported no need in 2005 also reported no need in 2008-9; 41.7% of those with no need in 2005 reported that they had a loan in 2008-9, while 8.3% reported that they applied for a loan but were rejected (Figure 2). A relatively high share of the large firms that had loans in 2005 had their loan applications rejected in 2008-9 (14.3%). In comparison, the share of small firms that had their loan applications rejected in 2008-9 was only about 7%, a figure that was similar regardless of the firms’ credit status in 2005. This pattern is also consistent with the notion that small firms were unlikely to apply for loans if their owners felt the probability of rejection was high.
Were there country-level factors that helped relieve the financial strains on firms? Perhaps surprisingly, the presence of a well-established group of foreign banks appears to have been a stabilizing influence. A firm from a country with a foreign banking share of 50% in 1999 was about 2 percentage points more likely to report finance was not an obstacle during the crisis than a firm from a country with no foreign bank participation in 1999. The pattern of results that we find is robust to using different measures of foreign bank participation and different years between 1999 and 2002. However, it is not robust to using foreign bank participation measures at or just before the crisis, presumably because by that time almost all of the countries in our sample had foreign banking shares above 50%.
While banks from industrialized countries were clearly at the epicenter of the recent financial crisis, and while many of their foreign affiliates curtailed their lending in the wake of the crisis, our firm-level results suggest that better-established foreign banks helped ease financial constraints during this period in Eastern Europe, perhaps because of their longstanding relationships with their clients. Encouraging foreign banks to continue—or set up—a full local presence might therefore be beneficial to host countries.
(If you can not see figure 1 and 2, click here)