The Role of Financial Structure The Role of Financial Structure and Financial Depth in Economic and Financial Depth in Economic

Growth:Growth:A Firm Level Analysis for TurkeyA Firm Level Analysis for Turkey

ByByOlcay YücelOlcay Yücel ÇULHA ÇULHAPınar ÖZBAY ÖZLÜPınar ÖZBAY ÖZLÜ

Cihan YALÇINCihan YALÇIN

INTERNATIONAL CONFERENCE ON SUSTAINABLE GROWTH STRATEGIES FOR

TURKEY

Swissotel, İstanbulFRIDAY, 17 JUNE 2005

Extensive literature on the relationship between financial system and growth starting from Schumpeter

Cross country panel data analyses confirm that well developed financial system supports economic growth.

Small, high tech firms contribute to employment, innovations and growth significantly as long as financial constraints that they face are relieved.

LITERATURE

Finance sources, share in total balance sheets

FINANCIAL STRUCTURE IN TURKEY: STYLIZED FACTS

 BankCredit

BondShareholder

EquityTrade

Credit (*)

G-7 Countries 0.23 0.08 0.63 0.06

Emerging Countries 0.27 0.20 0.40 0.14

Turkey 0.30 0.00 0.43 0.27

(*):For Turkey it is defined as the sum of trade credits and credits from partners, participations and the others (based on 4 thousand manufacturing firms)

The finance choice of firms classified according to different firm groups for 1995-2003 period are given in details in Figures (based on 2 thousand manufacturing firms that report regularly).

FINANCIAL STRUCTURE IN TURKEY: STYLIZED FACTS

18.5

22.4

9.0

9.3

34.8

19.8

22.8

9.0

9.0

34.3

19.1

23.2

11.1

12.8

29.9

13.7

21.3

8.4

10.7

35.9

13.9

20.3

8.3

10.0

37.8

0%

20%

40%

60%

80%

100%

1995-2003 2000 2001 2002 2003

ST Bank Loans ST Trade Credits ST Other Debt LT Debt Shareholder Equity

17.7

24.0

13.8

6.1

38.4

23.4

18.7

3.9

13.9

40.0

15.7

24.4

16.4

6.6

36.9

27.2

19.6

5.1

16.3

31.8

14.1

23.0

12.8

6.7

43.4

19.6

19.1

4.0

17.6

39.7

0.0

25.0

50.0

75.0

100.0

Small Large Small Large Small Large

1995-2003 2001 2002-2003

SIZE

ST Bank Loans ST Trade Credits ST Other DebtLT Debt Shareholder Equity

22.3

24.4

10.38.0

35.0

20.7

20.5

6.410.1

42.3

21.2

24.9

11.6

8.2

34.1

22.2

21.6

7.8

12.0

36.4

18.1

23.7

9.1

9.0

40.0

17.7

20.5

6.111.5

44.1

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

Young Old Young Old Young Old

1995-2003 2001 2002

AGE

ST Bank Loans ST Trade Credits ST Other Debt

LT Debt Shareholder Equity

12.0

26.0

14.7

6.7

40.6

29.2

20.4

5.4

10.0

35.1

10.5

26.0

18.3

8.2

36.9

30.3

22.2

5.7

11.2

30.6

8.6

24.8

14.5

7.3

44.8

24.8

21.0

5.1

11.9

37.1

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

Low Export High Export Low Export High Export Low Export High Export

1995-2003 2001 2002-2003

EXPORT SHARE

ST Bank Loans ST Trade Credits ST Other Debt LT Debt Shareholder Equity

0

20

40

60

80

100

120

140

16019

86

1988

1990

1992

1994

1996

1998

2000

2002

2004

Yü

zde

Banking Sector Balance Sheet/GDP

Broad Money/GDP

Bank Credits/GDP

FINANCIAL STRUCTURE IN TURKEY: STYLIZED FACTS

Turkey has witnessed a long-lived macroeconomic instability which also distract the mechanisms that allocate resources from savers to investors. The unavailability and high cost of financial sources turned out to be obstacles that potentially restrain sustainable economic growth and employment.

By this study, we try to uncover the implications of the firms’ finance choice for various firm groups, namely small, large, young, old, high-tech etc. We want to answer the following question:

Does the current financial system support small and medium sized, young, high tech firms that are main contributors of employment, innovation and thus economic growth?

MOTIVATION

This study uses the data set of balance sheets, income statement and other information belonging to firms which report information regularly to the Central Bank of Turkey. Around 4 Manufacturing thousand firms

DATA

GGSALESALEitit = f( = f(LEMPLEMP

itit, EXPSHA, EXPSHAitit, PROFITA, PROFITA

itit, LTALAB, LTALABitit, ,

EXTFINEXTFINit, it, EXTFINEXTFIN

itit*DUM*DUMjj, MBLOAN, MBLOAN

t,t,

MBLOANMBLOANtt*DUM*DUM

jj, GDP, GDPtt, YDUM, YDUM) )

MODEL

DESCRIPTION OF VARIABLES

GSALEit Change in the logarithm of real sales (growth of firm sales)

LEMPit, The logarithm of firm employment to control for the firm size.

EXPSHAit

,The share of exports in total sales (%) to consider the openness of the firms.

PROFITAi

t

The ratio of retained earnings in total assets (%) to control for profitability

LTALABit The logarithm of the ratio of the real tangible assets to number of employees.

BLOSHitThe share of bank loans in total private credits of the banking system (%)

RTBLOitThe share of bank loans in total balance sheets of firms (%)

RTCREDitThe share of short-term trade credits in balance sheet (%)

ROSTDitThe share of short-term other debt in balance sheet (%)

MBLOAN

t

Indicator for financial debt and is the ratio of private credit extended by banks to gross domestic product (%) .

GDPt Growth rate of Gross Domestic Product (%)

YDUM Time dummies

  All Firms Small Medium Large

MBLOAN 0,005** 0,010*** 0,003 0,002

  (2,36) (4,36) (1,42) (0,89)

MBLOAN*DUM   -0,013*** 0,004 0,014***

    (5,36) (1,51) (4,62)

BLOSH 0,142*** 0,150*** 0,151*** 0,043

  (5,26) (5,52) (5,32) (0,57)

BLOSH*DUM   -0,132 -0,097 0,121

    (0,73) (1,11) (1,50)

  Young Hi-tech Quoted Crisis

MBLOAN 0,003 0,008*** 0,005** 0,005**

  (1,38) (3,83) (2,36) (2,54)

MBLOAN*DUM 0,003 -0,015*** 0,001 -0,002**

  (1,46) (5,31) (0,28) (2,33)

BLOSH 0,083** 0,184*** 0,160*** 0,127***

  (2,46) (6,50) (5,55) (4,64)

BLOSH*DUM 0,163*** -0,434*** -0,130* 0,147***

  (2,94) (4,80) (1,79) (3,09)

  All firms Small Medium Large

MBLOAN 0.003 0.008*** 0.001 -0.000

  (1.35) (3.53) (0.42) (0.05)

MBLOAN*DUM   -0.013*** 0.004* 0.013***

    (5.63) (1.72) (4.68)

RTCRED 0.005*** 0.005*** 0.004*** 0.005***

  (16.08) (13.04) (11.16) (15.39)

RTCRED*DUM   -0.001** 0.002*** -0.000

    (2.53) (3.12) (0.56)

CONSTANT -0.758*** -0.758*** -0.760*** -0.753***

  (10.91) (10.92) (10.94) (10.84)

  Young Hi-tech Quoted Crisis

MBLOAN 0.002 0.006*** 0.003 0.003

  (0.67) (2.69) (1.35) (1.57)

MBLOAN*DUM 0.003 -0.013*** -0.000 -0.003***

  (1.08) (4.53) (0.06) (2.78)

RTCRED 0.004*** 0.004*** 0.005*** 0.005***

  (9.36) (13.13) (16.02) (15.02)

RTCRED*DUM 0.001** 0.002*** -0.000 0.001**

  (2.46) (3.08) (0.12) (2.42)

We believe that long-lived macroeconomic instability and high public borrowing requirement distracted the functioning of financial sector and prevent the development of well functioning financial institutions.

Non-financial firms, mainly large ones, behaved as intermediaries, which led to inefficiencies in the economy.

Inefficiencies in the banking sector and other institutional weaknesses caused the short term trade credits to appear as a widely used financing source for firms that are in need of external finance. This structure is far from supporting long-term investment and thus sustainable growth as specialization is discouraged and non-market relations along with informal financial activities are encouraged.

Empirical results show that small, high-tech firms that are main sources of the employment and innovation, are not well-supported by this system.

We believe that this financial structure is one of the main obstacles for creating new jobs and thus achieving sustainable economic growth.

CONCLUSIONS

As evident in many developed countries, diversification in the finance choices in the forms of issuing bonds and equity and especially venture capital is believed to improve the institutional quality of the financial system. This implies less informality, cheaper resources, competition, more resources for weakly capitalized firms and innovative investment. In this context, improvement of the corporate governance is the key issue in the sense that it may provide right signals to savers and financial intermediaries. Reliable reporting and availability of proper ratings are believed to support institutionalization of small and medium sized firms.

CONCLUSIONS