Firm size and the impact of credit crunch on enterprise financing in emerging markets

Using panel data on 21,867 firms from the 2002-2009 Business Environment and Enterprise Performance Surveys (BEEPS) we examine how firm-level characteristics and economy-wide institutional settings influence firms’ perceptions of financial constraints and their choices of investment finance. The data enables a perspective on the effects of the global financial crisis that in 2008 hit hard the emerging markets of Europe and Central Asia. Our analysis of relative percentages of types of investment finance used by the small and medium-sized firms (SMEs) in the region, vis-à-vis the financing mix of large firms, points to a greater flexibility of the SMEs in responding to a sharp credit supply shift: smaller firms are able to respond by increasing relative percentages of alternative financing sources such as trade credit and external equity. As evidenced by the BEEPS data, in the midst of the global credit crunch, differences between small and large firms in the degree to which firms say they are constrained are largely eliminated. Tests confirm that it is switching to trade credit at a time of crisis that can soften financing constraints. In particular, the relative percentage of trade credit in the financing mix appears to pick up a significant difference in perceived financing constraints across the size categories and positively affects the propensity of SMEs to declare themselves as less financially constrained.