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Abstract
Evidence suggests that a disproportionately greater share of formal finance is channelled to large enterprises in emerging economies, limiting the flow of appropriately-financed small and medium enterprises (SMEs). Market and information imperfections are conventionally seen as major causes of this misallocation. However, the role of political factors in affecting the distribution of formal finance has become more widely acknowledged in recent times. Our analyses of SMEs in post-communist economies also show that measures of political connectedness improve the chances of receiving bank credit and that the benefits of these links are stronger for well-established and larger SMEs.
Notes
1. We use the term interpersonal connectedness to imply entrepreneurs’ links with bureaucrats which can give firms unfair advantage in accessing scarce resources, which in this case is formal finance. Given the exclusive and interpersonal nature of such contacts, we will use the terms interpersonal connectedness and interpersonal bureaucratic networks interchangeably.
2. The size of bribes and gifts (q.j6) has a large number of missing observations in the dataset (more than four-fifths of the observations) and therefore it is not used here to reflect informal payments.
3. Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic and Slovenia.
4. Albania, Bosnia and Herzegovina, Kosovo, Macedonia, Montenegro and Serbia.
5. Armenia, Azerbaijan and Georgia.
6. Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan.
7. Belarus, Russia, Ukraine and Moldova.
8. Similar tests were also carried out for the loan interest equation. Our target variables remained insignificant in all these tests, so these results are not reported here for brevity but are available on request.