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SMEs and financial dependence: how important are foreign banks?

SMEs and financial dependence: how important are foreign banks? The importance of financial dependence of small and medium enterprises (SMEs) on their performance is a relatively unaddressed area of research. Relatedly, whether and to what extent foreign bank penetration exerts an impact in the presence of financial dependence also remains an open question. The purpose of the paper in this regard is to exploit unit-level data on Indian SMEs and assess the independent and interactive effects of financial dependence on SME behaviour, in the presence of foreign banks.Design/methodology/approachThis study uses fixed effects specification to address the issue. In subsequent analysis, this study also uses an instrumental variable approach for robustness.FindingsThe results indicate that financial dependence improves investment and employment, although there is a decline in productivity. These findings differ across size classes of SMEs. Similar is the evidence in the presence of foreign banks. In particular, foreign bank penetration leads to a decline in investment for micro and medium SMEs, although for small SMEs, the impact is found to be the opposite.Originality/valueTo the best of the author’s knowledge, this is one of the early within-country studies to examine the interface between SMEs and financial dependence and the role played by foreign banks in this regard. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Indian Growth and Development Review Emerald Publishing

SMEs and financial dependence: how important are foreign banks?

Ghosh, Saibal
Indian Growth and Development Review , Volume 17 (3): 17 – Nov 6, 2024
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References (69)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1753-8254
eISSN
1753-8262
DOI
10.1108/igdr-03-2023-0026
Publisher site
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Abstract

The importance of financial dependence of small and medium enterprises (SMEs) on their performance is a relatively unaddressed area of research. Relatedly, whether and to what extent foreign bank penetration exerts an impact in the presence of financial dependence also remains an open question. The purpose of the paper in this regard is to exploit unit-level data on Indian SMEs and assess the independent and interactive effects of financial dependence on SME behaviour, in the presence of foreign banks.Design/methodology/approachThis study uses fixed effects specification to address the issue. In subsequent analysis, this study also uses an instrumental variable approach for robustness.FindingsThe results indicate that financial dependence improves investment and employment, although there is a decline in productivity. These findings differ across size classes of SMEs. Similar is the evidence in the presence of foreign banks. In particular, foreign bank penetration leads to a decline in investment for micro and medium SMEs, although for small SMEs, the impact is found to be the opposite.Originality/valueTo the best of the author’s knowledge, this is one of the early within-country studies to examine the interface between SMEs and financial dependence and the role played by foreign banks in this regard.

Journal

Indian Growth and Development Review – Emerald Publishing

Published: Nov 6, 2024

Keywords: SMEs; Financial dependence; Foreign banks; India; G21; L22

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