Does banking concentration lead to the credit rationing of innovative enterprises?

Abstract

Studies have found that banking concentration increases financing obstacles, and this is however negatively related to the firm size. Moreover the level of both economic and financial development in a country, has been found to weaken the relationship between banking concentration and financing obstacles. This thesis studies the effect of banking concentration on innovative enterprises across different countries. The data sets spans across waves of observations from the year 2000 to 2016. These observations were mainly obtained from the World Bank databases and the waves of Community Innovation Surveys that have been undertaken across the world. The study uses a system generalized method of moments to test and analyze how banking concentration affects innovative enterprises. The primary measure of banking concentration is the 5-banks concentration ratio, and we proxy for credit rationing using the lack of access to finance cited by the innovative enterprises. The results of the study are antithetical and show that banking concentration has a negative relationship with the credit rationing of innovative enterprises. In a nutshell these results predict that an increase in banking concentration is expected to result in a fall in the credit rationing of Innovative enterprises. These results therefore idiosyncratically suggest that high banking concentration is much more beneficial for the traditionally opaque firms, such as innovative enterprises. This view is corroborated by the information-based theories, which suggest that in a highly concentrated credit markets lenders can harness high efficiency in their screening processes, leading to better access to credit for the traditionally opaque firms.