1、Po l i c y Re s e a R c h Wo R k i n g Pa P e R 4465Formal versus Informal Finance:Evidence from ChinaMeghana AyyagariAsli Demirg-KuntVojislav MaksimovicThe World BankDevelopment Research GroupFinance and Private SectorTeamJanuary 2008WPS4465Public Disclosure AuthorizedPublic Disclosure AuthorizedPu
2、blic Disclosure AuthorizedPublic Disclosure AuthorizedProduced by the Research Support TeamAbstractThe Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out
3、 quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the In
4、ternational Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.Po l i c y Re s e a R c h Wo R k i n g Pa P e R 4465China is often mentioned as a counterexample to the findings in
5、 the finance and growth literature since, despite the weaknesses in its banking system, it is one of the fastest growing economies in the world. The fast growth of Chinese private sector firms is taken as evidence that it is alternative financing and governance mechanisms that support Chinas growth.
6、 This paper takes a closer look at firm financing patterns and growth using a database of 2,400 Chinese firms. The authors find that a relatively small percentage of firms in the sample utilize formal bank finance with a much greater reliance on informal sources. However, the results suggest that de
7、spite its weaknesses, financing from the formal This papera product of the Finance and Private Sector Team, Development Research Groupis part of a larger effort in the department to study the role of formal versus informal finance in development. Policy Research Working Papers are also posted on the
8、 Web at http:/econ.worldbank.org. The author may be contacted at ayaptencoworldbank.org. financial system is associated with faster firm growth, whereas fund raising from alternative channels is not. Using a selection model, the authors find no evidence that these results arise because of the select
9、ion of firms that have access to the formal financial system. Although firms report bank corruption, there is no evidence that it significantly affects the allocation of credit or the performance of firms that receive the credit. The findings suggest that the role of reputation and relationship base
10、d financing and governance mechanisms in financing the fastest growing firms in China is likely to be overestimated. Formal versus Informal Finance: Evidence from China Meghana Ayyagari Asli Demirg-Kunt Vojislav Maksimovicc_ cAyyagari: School of Business, George Washington University(ayyagarigwu.edu
11、); Demirg-Kunt: World Bank(ademirguckuntworldbank.org); Maksimovic: Robert H. Smith School of Business at the University of Maryland(vmaksimovicrhsmith.umd.edu). This research was supported by NSF Grant #SES-0550573 (454). We would like to thank Bernard Yeung, Colin Xu, Patrick Honohan, Franklin All
12、en, Amit Bubna, L. Alan Winters, Jiawen Yang, and seminar participants at the World Bank, Indian School of Business, University of Amsterdam, McGill University and The Chinese University of Hong Kongs (CUHK) Conference on Contemporary Issues of Firms and Institutions, for their suggestions and comme
13、nts. This papers findings, interpretations, and conclusions are entirely those of the authors and do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent. 2Introduction Financial development has been shown to be associated with faster growth
14、 and improved allocative efficiency.1While the research focus has been on formal financial institutions, the literature has recognized the existence and role played by informal financial systems, especially in developing economies.2The dominant view is that informal financial institutions play a com
15、plementary role to the formal financial system by servicing the lower end of the market - informal financing typically consists of small, unsecured, short term loans restricted to rural areas, agricultural contracts, households, individuals or small entrepreneurial ventures. Informal financial insti
16、tutions rely on relationships and reputation and can more efficiently monitor and enforce repayment from a class of firms than commercial banks and similar formal financial institutions can.3According to this view however, informal financial systems cannot substitute for formal financial systems bec
17、ause their monitoring and enforcement mechanisms are ill-equipped to scale up and meet the needs of the higher end of the market.41This literature includes cross-country studies (King and Levine, 1993; Levine and Zervos, 1998; Levine, Loazya and Beck, 2000; and Bekaert, Harvey and Lundblad, 2001 and
18、 2005), firm level studies (Demirguc-Kunt and Maksimovic, 1998; Love, 2003; Beck, Demirguc-Kunt, and Maksimovic, 2005), industry level studies (Rajan and Zingales, 1998; Wurgler, 2000; Beck, Demirguc-Kunt, Laeven, and Levine, 2006) and individual country case studies (Guiso, Sapienza, and Zingales,
19、2002 in Italy and Bertrand, Schoar and Thesmar, 2004 in France) 2By informal financial institutions, we refer to the entire gamut of non-market institutions such as credit cooperatives, moneylenders, etc. that do not rely on formal contractual obligations enforced through a codified legal system. 3A
20、 large economics literature has also argued that informal institutions have a comparative advantage in monitoring (the peer monitoring view as in Stiglitz (1990) and Arnott and Stiglitz (1991) and enforcement capacity. Theoretically the informal sector has been modeled as both, a competitor to its f
21、ormal counterpart (as in Bell et al., 1997; Jain, 1999; Varghese, 2005) as well as a channel of formal funds, where informal lenders who offer credit acquire formal funds to service entrepreneurs financing needs (Floro and Ray, 1997; Bose, 1998; Hoff and Stiglitz, 1998). Both strands of literature e
22、mphasize that informal lenders hold a monitoring advantage over the formal lender. 4There is a direct parallel with the prevalence of angel finance in the US. Business angels are typically wealthy individuals who provide the initial funding to young new firms with modest capital requirements However
23、, Lerner (1998) argues that there is no evidence that angel financing generates positive financial returns or improves social welfare. 3More recently, studies have emphasized the critical role played by informal networks and financial channels even in developed markets. Guiso, Sapienza and Zingales
24、(2004) show that social capital affects the level of financial development across different regions of Italy and is particularly important when legal enforcement is weaker and among less educated people who have limited understanding of contracting mechanisms. Gomes (2000) investigates why minority
25、shareholders invest in IPOs in environments with poor investor protection rights and concludes that controlling shareholders commit implicitly not to expropriate them because of reputation concerns. Garmaise and Moskowitz (2003) show that even in the United States, informal networks play an importan
26、t role in controlling access to finance. Using the commercial real estate market as an example they show that brokers serve an important role in providing clients access to finance and that brokers and banks develop informal networks that have a significant effect on availability of finance. While t
27、he above work shows the existence of informal networks alongside formal systems, a controversial extension of this literature has been recent work by Allen, Qian, and Qian (2005), Tsai (2002), and Linton (2006) who argue that private sector firms in China, despite facing weaker legal protections and
28、 poorer access to finance than firms in the state and listed sectors, are the fastest growing due to their reliance on alternative financing and governance mechanisms.5Allen, Qian, and Qian (2005) further suggest that China may be an important counter-example to the law and finance literatures focus
29、 on formal systems since the fastest growing Chinese firms rely on alternative financing channels rather than formal external finance. 5Besley and Levenson (1996) have also argued that economies like Taiwan (China) grew despite an underdeveloped formal financial sector due to informal institutions.
30、4In this paper, we use detailed firm level survey data on 2400 firms in China to investigate which of the two views are consistent with the operation of the informal sector in China. Is the informal sector associated with high growth and profit reinvestment and serve as a substitute to the formal fi
31、nancial system or does the informal sector primarily serve the lower end of the market? To answer this question, we first investigate whether Chinese firms financing patterns are different when compared to those of similar firms in other countries that have been the focus of the prior literature. Ne
32、xt, we explore how the financing patterns, both formal and informal, vary across different types of firms across cities and regions. We then study how bank finance and financing from informal sources are associated with firm sales growth, productivity growth and profit reinvestment. We address these
33、 issues using a new data source, the Investment Climate Survey6, a major firm level survey conducted in China in 2003 and led by the World Bank. The survey has information on financing choices for firms across 18 different cities. One of the strengths of the survey is its coverage of small and mediu
34、m enterprises. Hence, in addition to information on commercial financing sources such as bank finance, the survey also includes information on sources of financing that are associated with small firm finance such as trade credit and finance from informal sources such as a money lender or an informal
35、 bank or other financing sources. We find that 20% of firm financing in our sample is sourced from banks, which is comparable to the use of bank financing in other developing countries such as India, Indonesia, Brazil, Bangladesh, Nigeria and the Russian Federation. However, the 6Other studies using
36、 the investment climate survey data on China include Cull and Xu (2005), Dollar et al. (2004). 5breakdown of non-bank financing sources shows greater differences. Compared to other countries, firms in our sample rely on a large informal sector and alternative financing channels as suggested by Allen
37、 et al. (2005). These other financing sources could well be the large underground lending in China, which represents several hundred billion dollars in bank deposits according to a recent McKinsey report (Farrell et al. (2006). At the firm level, we find that bank financing is more prevalent with la
38、rger firms as expected.7We also find substantial firm level heterogeneity in financing patterns within China. The firms in the sample come from five different regions of China: Coastal, Southwest, Central, Northwest, and Northeast. The financing patterns show that the largest amount of bank financin
39、g is in the Coastal (23.3%) and Southwest regions (26%) that have an investment climate that facilitates access to formal sources of external finance. We find that firms using formal bank finance grow faster than those financed from alternative channels. Our results hold even when we exclude firms r
40、egistered as publicly traded companies or state owned companies and look at a sample of just private sector firms, which are the fastest growing firms in the Chinese economy. We also find that firms financed by formal bank finance experience higher reinvestment rates, and productivity growth at leas
41、t equal to that of firms financed from non-bank sources. This suggests that the growth financed by banks is not inefficient growth. The papers results do not rely on establishing causality since even if it were the case that fastest growing firms are bank financed, then by revealed preference we kno
42、w that at the margin banks are a better alternative to informal finance for fast growing firms. 7Note that the large firms in our sample might be equivalent to small and medium enterprises in other economies. 6However, we use a full battery of alternative specifications, a selection model, instrumen
43、tal variables estimators and a matching estimator, to empirically test for the possibility that firms that obtain bank loans grow less fast than similar firms that rely on informal or other sources of financing. We find that, controlling for the endogeneity of the bank financing decision, bank finan
44、ce is associated with higher sales growth and profit reinvestment. Controlling for perceived imperfections in the allocation of bank loans such as corruption among bank officers and importance of government help in obtaining loans in the selection models strengthens the effect of bank financing on f
45、irm performance. When we estimate a matching model, again we find that conditional on firm characteristics such as size, age, legal status, ownership and city location, bank financed firms grow faster and reinvest more compared to non-bank financed firms. We also directly compare the performance of
46、firms which report bank loans with that of firms that rely on external financing from informal sources. Firms which rely on informal external financing have lower profit reinvestment rates and do not grow faster or have higher productivity growth than firms that are bank financed. Only when informal
47、 financing is defined, as in Allen et al (2005), to include internal financing, is informal financing associated with higher productivity growth and reinvestment (but not higher growth). While we find the majority of firms that receive bank loans grow faster as a result, we do find a subpopulation o
48、f firms that do not. Firms that report that government help was instrumental in obtaining a bank loan, about 16% of the sample, do not show improvements in growth, reinvestment or productivity. However, these results do not 7make China an exception to the growth and finance literature. They are cons
49、istent with the work on socialized banks by La Porta et al. (2002) and Cole (2007). Overall, our results suggest that even in fast growing economies like China where the formal financial system serves a small portion of the private sector, external finance from the formal financial system is associated with faster growth and higher profit reinvestment rates for those firms that receive it. We find no evidence that alternative financing channels are associated with higher growth. While we have some limited evidence that informal finance might help
