the implications for productivity of financial constraints: a firm-level investigation of italy

The Implications for

Productivity of Financial Constraints: a Firm-Level

Investigation for Italy

Productivity Forum - OECD

July, 7 - 8 2016

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The issues at stake The structural problems that the Italian economy faces date back to well

before the onset of the great financial crisis. These structural difficulties are

well summarized by the weak pattern of TFP over the last twenty years

The crisis has negatively impinged on the weak pattern of productivity

causing a further deterioration of it

Several explanations have been proposed. We focus on the role of access

to finance for firms and the their difficulties in attracting external funds

We investigate whether the crisis has amplified the severity of the financial

restraints and whether the sensitivity of productivity to financial constraints

has changed in the aftermath of the crisis

We focus on firm-level data investigating the implications of the use of

finance by firms for their own productivity developments

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Background

A large body of empirical and theoretical literature points to the existence of a

positive relationship between financial development and growth …and negative

impact of financial constraints on productivity

1. High levels of productivity are generally detected in firms characterized by a

high incidence of: a) innovative investment projects that often need a long

horizon to yield returns, b) intangible assets such as those pertaining to

R&D activities and c) human capital

2. If financial restraints bind and thus affect the investment decision and the

demand for the other inputs, then the input combination diverges from the

one that would prevail for an unconstrained firm.

3. Investment in intangible assets are more subject to financial constraints

due to a) their low value as collateral compared to standard tangible assets

and b) the higher uncertainty surrounding their expected returns

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A quick survey of the literature

We review the literature related to the following topics:

the relationship between the use of finance by firms and their productivity

the role of investment on intangibles

Misallocation and its impact on productivity

Disruption in the diffusion of knowledge and technology

Underlying questions:

How does financially constraints feed into the previous issues?

How did crisis interplay with the role of financial constraints?

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Empirical work on Italian manufacturing sector

Use of Bureau Van Dick data (Orbis and Amadeues) from 2005 to 2015

Preliminary analysis:

Cursory view of financial conditions of corporate sector

Construction of Financial Condition Index (FCI) as Pal & Ferrando (2010)

Regression analysis on the role of Financial Constraints

First, we use a direct approach to appraise the impact of financial constraints on

productivity levels. We augment the Olley and Pakes’ method as in Fernandes

(2007) and Ferrando-Ruggieri (2015): FCI is an “input” of the production function

Second, we use an indirect approach where - after estimating a production function

equation to derive productivity – we estimate an equation to assess the impact of

the indicator of financial constraints on productivity growth e.g. Fernandes (2007)

Moreover, we use a productivity equation at the sectoral level to investigate the

technology diffusion mechanism described earlier and role played by financial

constraints in disrupting diffusion; e.g. Dan Andrews et al. (2015)

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The rate of change of TFP in manufacturing -

comparing 4 measures: Istat, weighted mean firm’s TFP growth rate

under different hypotheses on financial constraints TFP dynamics on different specifications (y-o-y percentage changes)

Source: MEF-DT elaborations on ORBIS and AMADEUS microdata as well as on ISTAT NA data from I.STAT.

Generally FCI Index contributes to weaken TFP dynamics.

-11.0%

-6.0%

-1.0%

4.0%

9.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

TFP annual growth rates by ISTAT

TFP estimation without FCI index

TFP estimation with FCI index both in polynomial term both as production factor

TFP estimation with FCI Index only in polynomial term

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The dispersion across firms of the TFP rate of growth TFP standard deviation on different specifications (y-o-y percentage

changes)

Source: MEF-DT elaborations on ORBIS and AMADEUS microdata.

TFP dispersion was very high before 2008. Instead, it diminished

during the economic crisis. The inclusion of FCI Index in TFP

estimation generally contributes to increase variability.

0.15

0.20

0.25

0.30

0.35

0.40

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

TFP estimation without FCI index



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The production function parameters with the augmented Olley-Pakes’

method (direct approach): the estimated effect of financial constraints table

FCI neither in

production function

no in polynomial term

FCI only on

polynomial term

FCI both in

production

function and in

polynomial term

Coefficient of labour 0.673 0.702 0.702

Coefficient of capital (separate estimation on sub-sector sub-

samples)

0.114 0.161 0.119

Coefficient of capital (single estimation on whole sample) 0.101(.0017) 0.101 (.002) 0.105 (.002)

Coefficient of age (separate estimation on sub-sector sub-

samples)

0.000 0.001 0.000

Coefficient of age (single estimation on whole sample) -0.002(.0003) -0.002 (.0004) -0.001 (.0004)

Coefficient of FCI Index (separate estimation on sub-sector

sub-samples)

-0.385

Coefficient of FCI Index (single estimation on whole sample) -0.292 (.008)

Note: standard errors could not be provided for the coefficients of labor as well for the other coefficients obtained on a separate estimation on sub-

sector samples. They have been estimated separately on sub-samples defined on the basis of sector and size.

Source: MEF-DT elaborations on ORBIS and AMADEUS microdata as well as on ISTAT NA data from I.STAT.

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A simple counterfactual exercise (the impact on TFP of a generalized

10 per cent reduction of the degree of financial constraints)

TFP levels (2005=100) with FCI both as in polynomial term as in production function: actual trend and trend with a 10% decrease of FCI.


-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

94

96

98

100

102

104

106

108

110

112

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


TFP estimation with FCI index both in polynomial term both as production factor (alternative hypothesis with a decrease of 10 per cent of the FCI- index)

Percentage cumulative gap (left axis)

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The productivity equation:

the effects of financial constraints on productivity

Dependent variable: logarithm of TFP in level under the hypothesis of FCI

only in the polynomial term

Coef.s (standard

errors in

brackets)

Lagged value of dependent variable 0.333

(0.013)

Lagged value of Financial Constraint Index (FCI) -0.754

(0.035)

Constant 4.150

(0.212)

Year effects Yes

Sector specific effects Yes

Size specific effects Yes

Arellano-Bond test for AR(1) in first differences -0.600

(0.552)

Note: The index is constructed as in Ferrando and Ruggieri (2015).


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the effects of crisis on productivity



Dependent variable: logarithm of TFP in level under the

hypothesis of FCI only in the polynomial term

Coef.s (standard errors in

brackets)

Lagged value of dependent variable 0.208

(0.015)

Lagged value of Financial Constraint Index (FCI) -0.155

(0.035)

Crisis (after 2008)#FCI -0.207

(0.038)

Constant 4.349

(0.241)

Year effects Yes



Arellano-Bond test for AR(2) in first differences -1.390

(0.165)

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Disruptions in the diffusion of technology from the frontier

firms: comparing average TFP growth of top 5% performers with

that of the remaining firms

TFP dynamics of top 5% performer and other 95% (2007=100)


TFP estimation without FCI index both in plynomial term both as

production factor


169.5

113.3

90

100

110

120

130

140

150

160

170

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Top 5 per cent Olter 95 per cent

151.8

113.9

90

100

110

120

130

140

150

160

170

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Top 5 per cent Olter 95 per cent

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the effect of the distance from the frontier (best 5%)



Dependent variable: logarithm of TFP in level under the hypothesis

of FCI only in the polynomial term

Two Stage IV Panel

regression (standard errors

in brackets)

Lagged value of dependent variable 0.831 (0.167)

Productivity gap (ECT) -0.804 (0.116)

Lagged value of Financial Constraint Index (FCI) -0.102 (0.035)

Growth of best 5% firms in each sector 0.298 (0.041)

Constant 0.158 (0.069)

Year effects Yes



Arellano-Bond test for AR(2) in first differences 0.300 (0.767)

the implications for productivity of financial constraints: a firm-level investigation of italy

Economy & Finance