Topic: Political connections and access to finance for SMEs around the world: The role of discouraged borrowers
Lecturer: Shusen QI Xiamen University
Time: 2:30-4:00 p.m. November 8th, 2019 (Friday)
Venue: B219, Zhixin Building
Abstract: Motivated by the international business literature that examines the interactions between organizations, corruption, and political forces, we examine whether and how political connections affect small and medium-sized enterprises’ (SMEs) credit access around the world. Using a sample of SMEs across 30 developing countries, we show that SMEs with political connections are significantly less likely to be discouraged from approaching banks for a loan as compared to SMEs without political connections. However, politically connected SMEs do not receive preferential lending from banks. Moreover, the nature of this effect depends on the institutional setting. Specifically, the effect becomes stronger in countries with high levels of corruption, suggesting that political connections are substitutes for poorly functioning formal institutions. We exploit multiple shocks to political connections across different countries to mitigate endogeneity concerns. Our findings have important implications for policies targeted at encouraging more borrowing, facilitating entrepreneurship, and attracting foreign investment.