Government connections and credit access around the world: Evidence from discouraged borrowers
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RESEARCH NOTE
Government connections and credit access around the world: Evidence from discouraged borrowers Shusen Qi1 and Duc Duy Nguyen2 1
School of Management, Xiamen University, Chengfeng Building, 422 Siming South Road, Xiamen 361005, China; 2 King’s Business School, King’s College London, Bush House, 30 Aldwych, London WC2B 4BG, UK Correspondence: DD Nguyen, King’s Business School, King’s College London, Bush House, 30 Aldwych, London WC2B 4BG, UK e-mail: [email protected]
Abstract Motivated by the international business literature that examines the interactions between organizations, corruption, and political forces, we examine whether and how government 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 government connections are significantly less likely to be discouraged from approaching banks for a loan as compared to SMEs without such connections. However, 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 government connections are substitutes for poorly functioning formal institutions. Our findings have important implications for policies targeted at reducing corruption, improving access to financing, facilitating entrepreneurship, and attracting foreign investment. Journal of International Business Studies (2020). https://doi.org/10.1057/s41267-020-00341-x Keywords: government connections; small-and-medium-sized enterprises (SMEs); access to finance; discouraged borrowers; institutional theory; corruption
Electronic supplementary material The online version of this article (https://doi.org/10.1057/s41267-020-00341x) contains supplementary material, which is available to authorized users. Received: 14 March 2019 Revised: 11 April 2020 Accepted: 5 May 2020
INTRODUCTION Lack of access to external financing is one of the most significant barriers to entrepreneurship in many countries around the world (OECD, 2014). Data from the World Bank indicate that one in every two small and medium-sized enterprises (SMEs) were credit constrained in 2008. An SME can become credit constrained if its loan application is rejected or when it is discouraged from seeking external finance in the first instance. While there is an extensive body of literature that examines the determinants and consequences of credit rejection (e.g., Berg, 2018), little is known about SMEs that need financing but do not apply for fear of rejection. There are strong theoretical grounds for investigating credit discouragement, given that it may lead creditworthy SMEs to forego credit, which has potentially negative implications for their future growth, innovation, and job creation. Although credit discouragement is a worldwide phenomenon, it is particularly acute in developing economies since their financial
Government connecti
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