132
FINANCIAL INCLUSION FOR FIRMS
in small companies (microcaps) may be more limited than their demand for stocks in large companies (Nair and Kaicker 2009). In fact, microcaps tend to be illiquid, meaning that the number of trades per listed company is relatively small compared with larger caps. Calculations based on data of the World Federation of Exchanges suggest that enterprises with market capitalization below $200 million made up 64 percent of the world’s listed companies in 2011, but accounted for only 14 percent of individual stock market trades and 4 percent of share trading volume. Similarly, a study of listed firms in China and India shows that larger firms are more likely than smaller firms to issue new equity, and the top 10 issuing firms capture a large fraction of the total amount raised through these issues (Didier and Schmukler 2013). Overall, the extent to which stock markets can be a viable and sustained source of finance for SMEs is thus not clear. In addition, even exchanges such as AIM tend to focus on the most rapidly growing SMEs so that stock markets may not be a financing solution for a broad range of SMEs. However, stock markets can potentially have positive spillover effects on SMEs; for example, if more large firms obtain financing through stock markets, they may need less financing from banks, and banks may expand their SME lending operations. YOUNG FIRMS: CAN FINANCE PROMOTE ENTREPRENEURSHIP? While a good deal of policy and research attention has been directed toward the financial inclusion of SMEs, greater emphasis is needed on the financing available to young firms. There are good reasons to focus on SMEs: the evidence shows that a sizable share of the SMEs in developing countries are credit constrained; alleviating these constraints may allow these firms to grow. Policy makers are also often concerned with job creation, and SMEs have traditionally driven job creation in developed countries.28 However, more recent empirical work, such as the research by Haltiwanger, Jarmin, and Miranda (2010), sug-
GLOBAL FINANCIAL DEVELOPMENT REPORT 2014
gests that (1) start-ups and surviving young businesses are critical for job creation, and (2) there is no systematic relationship between firm size and employment growth after one controls for firm age. These results do not necessarily apply in developing economies, where firms, especially small ones, face many institutional constraints. Thus, research shows that firm dynamics in India and Mexico are different from the dynamics in the United States: firms grow much more slowly as they age in India and Mexico compared with firms in the United States (Hsieh and Klenow 2012). Ayyagari, Demirgüç-Kunt, and Maksimovic (2011a) study the relationships across firm size, age, and growth using data for 99 economies from the World Bank enterprise surveys. They find that SMEs and young firms exhibit higher job creation rates than large and mature firms, showing that size is still a good predictor of employment growth after they have controlled for age. However, large firms and young firms exhibit higher productivity growth. Overall, these findings suggest that it is important to focus on promoting finance among both SMEs and young firms in developing countries.29
The financing challenges faced by young firms Similar to microenterprises and SMEs, young firms may be credit constrained because of principal-agent problems. Because young firms have not been in the market for long, there is little information on their performance or creditworthiness. Data from the World Bank enterprise surveys on more than 70,000 firms in more than 100 countries show that, in all countries, younger firms rely less on bank financing and more on informal financing from family and friends (figure 3.8). Only 18 percent of firms that are 1 or 2 years old used bank financing, compared with 39 percent of firms that are 13 or more years old. In contrast, 31 percent of firms that are 1 or 2 years old rely on informal sources of finance, such as family and friends, whereas only 10 percent of firms that are 13 or more years old obtain financing from informal sources