Working Paper: NBER ID: w8960
Authors: Raymond Fisman; Inessa Love
Abstract: Recent work suggests that financial development is important for economic growth, since financial markets more effectively allocate capital to firms with high value projects. For firms in poorly developed financial markets, implicit borrowing in the form of trade credit may provide an alternative source of funds. We show that industries with higher dependence on trade credit financing exhibit higher rates of growth in countries with weaker financial institutions. Furthermore, consistent with barriers to trade credit access among young firms, we show that most of the effect that we report comes from growth in the size of pre-existing firms.
Keywords: Trade Credit; Financial Development; Industry Growth
JEL Codes: G15; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade credit financing (G32) | Industry growth (L16) |
| Higher reliance on trade credit (G32) | Higher growth rates in industries (O25) |
| Trade credit acts as a substitute for formal financial intermediation (G21) | Industry growth (L16) |
| Growth of credit-intensive industries (G21) | Growth through expansion of preexisting firms (D25) |
| Trade credit usage is a response to poor financial development (F65) | Industry growth (L16) |