Tuesday, October 12, 2010: 8:30 AM
Using firm-level data from 2007 for Turkey and a group of eighteen transition economies of Europe and Central Asia, the paper examines the cross-sectional relation between types of investment finance and its determinants and presents evidence on co-determination by the small technology-based firms of their financing choices, sales growth strategies, and propensity to innovate. The financing choices are cast it terms of the relative importance of four complementary (co-existent) sources: private bank loans, state-owned bank loans, trade credit, and earned equity. Applying the seemingly unrelated regression equations (SURE) model, we find that earned equity by far dominates the financing mix in our sample of 160 entrepreneurial firms. Propensity to innovate, found a lot to do with educated workforce, positively correlates with the ratio of earned to total equity and with borrowing from private banks. Financing with private bank loans relates positively to exporting and firm size, the latter finding being consistent with the bankers facing heavy information asymmetries and thus rationing smaller businesses. Being a larger firm is, however, associated negatively with the relative share of funding via state-owned banks, perhaps reflecting the priorities for small enterprise support these banks might have had over the analysis period. It is more profitable firms and recipients of the State of EU grants as well as those with a more diversified product range who tend to have a large proportion of loan finance from state-owned banks. Characteristics of managers and owners seem to have certain implications for the financing mix. Having females amongst owners is inversely related to the relative share of loans extended by state-owned banks. Trade credit, albeit being a type of debt finance of relatively little weight, is positively associated with manager’s experience and is more reliant upon by firms run by female managers, which points to the role social capital and personal relationship might play in broadening the spectrum of financing options.