Firm Growth, Financial Constraints, and Policy-Based Finance

Author Name Tim E. DORE (Federal Reserve Board) / OKAZAKI Tetsuji (Faculty Fellow, RIETI) / ONISHI Ken (Federal Reserve Board) / WAKAMORI Naoki (University of Tokyo)
Creation Date/NO. October 2020 20-E-082
Research Project Historical Evaluation of Industrial Policy
Download / Links


This paper investigates how additional credit supply affects the growth of small and medium enterprises (SMEs) by looking at a unique policy-based, small business lending program in Japan. Combining the loan-level data provided by the Japan Finance Corporation with the financial statement database for SMEs, we compare outcomes between SMEs receiving the loan (treated group) and SMEs not receiving the loan (control group). We find that policy-based credit supply increases investment and employment, which results in a higher long-run growth rate of SMEs. SMEs increase their asset value and hire more employees immediately after the credit supply and the effects stay persistent over years. On the other hand, sales increases gradually over years, which suggests that the credit supply changes the growth rate of SMEs, though we cannot detect any improvement in labor productivity. The persistent differences in long- and short-term loans between treated and control groups may suggest that SMEs are indeed credit constrained and face difficulty finding alternative financing sources.