The effect of a credit policy change on microenterprise upward transition and growth: evidence from Indonesia
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The effect of a credit policy change on microenterprise upward transition and growth: evidence from Indonesia Ilmiawan Auwalin1 Received: 30 August 2019 / Revised: 11 August 2020 / Accepted: 27 August 2020 © Eurasia Business and Economics Society 2020
Abstract This paper attempts to establish a causal relationship between a government micro and small enterprises (MSEs) credit promotion policy and MSEs’ upward transitions and growth. Indonesian firm level data in conjunction with the cancellation of a mandatory MSE credit policy in 2001 by the Indonesian government are employed in the analysis. Firstly, estimations of the year-on-year micro to small size category transitions indicate the negative effect of the policy change on the upward transition of micro firms. Secondly, causal effect analysis using difference-in-differences (DiD) estimation, by employing the policy change as an exogenous shock on the MSE credit availability and setting medium and large enterprises (MLEs) as the counterfactual group, suggests that the policy cancellation reduces the probability of a micro firm to become a small firm by 1.3% relative to the MLEs’ probability of transitioning between size categories. The negative effect on turnover growth is also identified. Keywords Mandatory credit policy · Microenterprise · Upward transitions · Growth JEL Classfication G28 · L25 · O17
1 Introduction Micro and small enterprises (MSEs) provide employment and income for substantial proportions of the population in many developing countries. The real and potential importance of these firms is also apparent in Indonesia. More than 90% of firms in Electronic supplementary material The online version of this article (https://doi.org/10.1007/s4082 1-020-00170-w) contains supplementary material, which is available to authorized users. * Ilmiawan Auwalin [email protected] 1
Faculty of Economics and Business, Universitas Airlangga, Jalan Airlangga No. 4‑6, Surabaya 60286, Indonesia
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Indonesia are MSEs and they provide more than 90% of the country’s total employment (Ministry of Cooperatives and SMEs 2013). Due to their ability to generate employment and income, promoting MSEs has been identified as one of the ways to help the poor exit poverty and to support economic growth (Mead 1994; Liedholm and Mead 1999; Cook 2001). However, MSEs often experience various constraints to growth compared to larger sized firms. Access to finance is often cited as one of the most important constraints faced by MSEs (Berger and Udell 1998; Schiffer and Weder 2001; Ayyagari et al. 2007; Rosengard and Prasetyantoko 2011). MSEs rely on both informal and formal financing to fulfil their capital needs. Since informal financing is often limited in scale, banks can potentially play an important role in satisfying MSEs financial needs. Unfortunately, MSEs typically face more significant difficulties in securing bank loans than do large firms (Schiffer and Weder 2001; Ayyagari et al. 2007; Beck and Demirguc-Kunt
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