The Inverted-U Relationship Between Credit Access and Productivity Growth

Abstract

In this paper we identify two counteracting effects of credit access on productivity growth: on the one hand, better access to credit makes it easier for entrepreneurs to innovate; on the other hand, better credit access allows less efficient incumbent firms to remain longer on the market, thereby discouraging entry of new and potentially more efficient innovators. We first develop a simple model of firm dynamics and innovation-base growth with credit constraints, where the above two counteracting effects generate an inverted-U relationship between credit access and productivity growth. Then we test our theory on a comprehensive French manufacturing firm-level dataset. We first show evidence of an inverted-U relationship between credit constraints and productivity growth when we aggregate our data at sectoral level. We then move to firm-level analysis, and show that incumbent firms with easier access to credit experience higher productivity growth, but that they also experienced lower exit rates, particularly the least productive firms among them. To confirm our results, we exploit the 2012 Eurosystem's Additional Credit Claims (ACC) program as a quasiexperiment that generated exogenous extra supply of credits for a subset of incumbent firms.

Financial development and performance of palm oil industry in Malaysia

“…The findings suggest that only financial stability has a significant and negative impact on palm oil production. This negative results associated with non-performing loans could be accrued to the effects of credit access on business efficiency (Aghion et al, 2018) and also on credit risk and asset quality (Chen et al, 2018). Results for model 3 and 5, however, shows the existence of model specification and autocorrelation problems, respectively.…”

“…In another related study, a negative association of finance -productivity linkage through credit access is documented by Aghion, Bergeaud, Cette, Lecat, and Maghin (2018). While existing literature argues that better credit access should have an unambiguously positive effect on economic growth especially on innovation-based growth (King & Levine, 1993a;Levine, 1997;Rajan & Zingales, 1998), Aghion et al (2018) provide evidence to support that better credit access allows less efficient incumbent firms to remain longer on the market, thereby discouraging entry of new and potentially more efficient innovators. This argument is also related to the effect of credit access on credit risk and asset quality (Chen, Feng, & Wang, 2018).…”

Factors and remedies for productivity and efficiency among small‐scale informal enterprises: A theoretical perspective

“…Prevailing evidence suggests that financially constrained firms in Europe lost as much as 21 per cent of productivity in comparison to unconstrained firms (Ferrando and Ruggieri 2018), and in nine sub-Saharan African countries financially constrained firms had 6.6 per cent lower marginal returns on capital (Amos and Zanhouo 2019). Aghion et al (2019), on the other hand, established a complex relationship between access to capital and productivity. They found that capital constraints had detrimental effect on long-run productivity, but also kept inefficient incumbent firms out of the market, resulting in an inverted U-shape relationship.…”

One Size Does Not Fit All: TFP in the Aftermath of Financial Crises in Three European Countries

“…First the concept of postcrisis is misleading for European countries having suered another deep crisis in 2011-13 (Figure 1). Second, focusing on the potential credit channel, the heterogeneity of national patterns is 1 Aghion et al (2018) propose theoretical underpinnings of reduced investment in illiquid projects such as R&D during recessions. evident.…”