Financial Deepening and Business Creation: A Regional Analysis of Colombia

ABSTRACT

Focusing on the individual regions of Colombia, we analyze the depth of the country’s financial sector and its incidence over business creation and economic growth. Financial deepening, measured by the ratio of time deposits to GDP and by the ratio of commercial bank loans to GDP, consistently shows a positive and significant relationship with business creation across the Colombian regions. These findings are also present when extending our analysis to study the impact of financial deepening on enterprise creation by industrial sectors. Lastly, regional new enterprise creation is found to be positively correlated with regional economic growth.

KEY WORDS:

• business creation
• Colombia
• financial deepening
• regional development

JEL:

• G21
• R11
• O54

Acknowledgments

José J. Cao-Alvira gratefully acknowledges the support of the Fulbright Program, as a significant portion of the research on this manuscript was conducted when Cao-Alvira was a Fulbright U.S. Research Scholar for Colombia. Support for this project was also provided by a PSC-CUNY award, jointly funded by the Professional Staff Congress and The City University of New York. We are also very grateful to Ali Kutan and two anonymous referees for their helpful comments.

Supplementary Material

Supplemental data for this article can be accessed here.

Notes

1. The 1119 Decree of April 11 2008.

2. The Conpes 3424 of May 16, 2006; commonly known as the “Bank of Opportunities.”

3. The 3078 Decree of September 8, 2006.

4. The Law 1429 of July 10 2010.

5. The Law 590 of July 10 2010, known as MiPyme law.

6. Provided that the domains on both data sets do not need to perfectly match, some instances may occur in which the index could be higher than one; e.g. Bogotá, Cundinamarca, and Sucre.

7. See the Supplementary Material, available online, for a detailed description of each industrial sector.

8. For brevity of its exposition, only the full model specification with pooled effects is presented in Table 4. The marginal contribution of fixed effects over pooled effects proved not being statistically significant in any of the scenarios.