We use the BEEPS database developed by the EBRD and the World Bank. The survey covers 28 transition countries and 6 European non-transition countries. Firms are asked to give information about the sources of finance, which allows us to make a judgement about whether or not they are credit constraint. We can identify the firms that declare themselves credit constrained but also distinguish between firms that have bank loans and those that do not. Moreover the questionnaire allows us to identify the reasons why firms did not apply for loans or were rejected by the banks. Another advantage is that endogeneity is reduced by identifying firms that did not apply for credit because they did not need it. Endogeneity can be a problem because the most dynamic firms, or the ones with the best opportunities for investment are also the ones complaining more about the stringency of credit constraints. This can lead to the conclusion that investment is actually stimulated by the existence of credit constraints.
Only a few papers base the study of credit constraints on information about the relationship of firms or individuals with banks (see Kaplan and Zingales (1997) for US firms and Field and Torero (2006) for individuals applying for bank loans in South America). The present paper uses regression analysis to identify the impact of credit constraints on firms’ investment activities. This can be done not only for fixed assets but also for investment in R&D, new product development and purchase of new technology.
The paper differs from the previous literature on transition countries in several respects: it covers micro data for a large number of countries; it uses questionnaire responses to identify firms that are constrained either by the cost of finance and/or by the availability of credit; transition countries can be compared with non-transition countries; changes in the impact of credit constraints over time can be analysed; the robustness of the findings can be checked in a restricted panel of firms that were questioned both in 2002 and in 2005.
While previous studies on transition find that firms are credit constrained in the sense that they tend to rely on internal finance because external finance is more expensive, it is less clear if the availability of finance is a factor in the firms’ investment decision. Indeed the EBRD (2005, p 86) suggests that self-declared difficulties in obtaining financing are not associated with less efficiency. The present paper is aiming to throw more light on the extent to which firms in transition are credit constrained and the degree to which this matters for their investment activities.