Can Firms with Political Connections Borrow More Than Those Without? Evidence from firm-level data for Indonesia

Author Name FU Jiangtao (Waseda University) / SHIMAMOTO Daichi (Waseda University) / TODO Yasuyuki (Faculty Fellow, RIETI)
Creation Date/NO. July 2015 15-E-087
Research Project Empirical Analysis on Determinants and Impacts of the Formation of Firm Networks
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Using unique firm-level data for manufacturing sectors in Indonesia, we examine how political and economic connections of firms affect their access to finance. We identify the political connections of a particular firm by whether the government owns its shares, whether politicians are on its board of directors, and whether its highly-ranked manager knows any politician personally. We find that politically connected firms are more likely to be able to borrow from state-owned banks. Moreover, being connected to the government raises the probability of being able to borrow as much as needed without any credit constraint. The financial benefit from political connections is more prominent for small and medium enterprises (SMEs) than for large firms. Furthermore, the benefit mostly comes from personal connections with politicians, rather than more formal connections as measured by government ownership or politicians on the boards of directors.

Published: Fu, Jiangtao, Daichi Shimamoto, and Yasuyuki Todo, 2017. "Can firms with political connections borrow more than those without? Evidence from firm-level data for Indonesia," Journal of Asian Economics, Vol. 52, pp. 45-55