Foreign bank presence The effect on firm creation and the size of

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Project funded under the Socio-economic Sciences and Humanities




Working Paper D.5.2                                                European Commission




                                 Foreign bank presence:
          The effect on firm creation and the size of start-ups


                              Olena Havrylchyk and Emilia Jurzyk




                                             January 2010
Financial Systems, Efficiency and Stimulation of Sustainable Growth             Working Paper   FINESS.D.5.2




                                              Foreign bank presence:

                          The effect on firm creation and the size of start-ups1



                                             Olena Havrylchyk, CEPII2

                                                  Emilia Jurzyk, IMF


                                                         Abstract

This paper studies the impact of foreign bank presence on the most opaque borrowers – start-
ups. We document that the entry rate of new firms is lower in industries characterized by
higher informational asymmetries, which are measured as a share of fixed assets, skill
dependence or prevalence of small firms. Our findings can be interpreted as evidence of credit
constraints and are consistent with the theories that argue that foreign banks have a
comparative advantage in lending to transparent firms, whereas domestic banks are better
suited to provide credit to opaque borrowers.




JEL: E51, G21, M13

Keywords: Entrepreneurship, Foreign bank entry, Asymmetric information, Economic
Growth




1
  We would like to thank Wendy Carlin and Jacques Melitz as well as participants at the CEPII seminar for
helpful comments and suggestions. Olena Havrylchyk gratefully acknowledges the financial support from the
European Commission (7th Framework Programme, Grant Agreement No.217266).
2
  Corresponding author: Address: 9 rue Georges Pitard, 75015, Paris, France; Tel.: +33 15368550, E-mail:
olena.havrylchyk@cepii.fr

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2     Introduction

         There is a consensus among economists that foreign bank entry to developing and
transition countries contributes to the higher and more stable supply of credit. This positive
development has been attributed to foreign banks’ higher efficiency that improved the
allocation of funds from depositors to creditors, their better access to international credit
markets and smaller sensitivity to idiosyncratic shocks. However, some studies reveal that
foreign banks are less likely to grant credit to small and opaque enterprises and instead
increase lending to large transparent firms and households. From the public policy
perspective, it is not important whether foreign banks lend to small and medium enterprises
(SMEs), as long as this effect is offset by domestic banks that boost their supply of loans to
these borrowers in the face of the higher competition from foreign banks. However, in
countries where foreign banks play a dominants role in the banking sector, entrepreneurs
could experience growing credit constraints.

         The consequences could be particularly dire for start-ups, which are the most opaque
clients and face credit constraints even in the presence of well developed financial markets.
Huck et al. (1999) find that new businesses rely heavily on credit from informal sources such
as business contacts and family. Despite this, banking credit remains the main source of non-
equity financing even for “infant” enterprises that are less than 2 years old (Berger and Udell,
1998). Those firms that borrow from banks tend to concentrate their borrowing at a single
institution, with which they form a long-term relationship which enables banks to collect
private information on creditworthiness of these firms (Petersen and Rajan, 1994). Given that
foreign banks prefer to use arm-length lending and avoid “relationship lending”, their entry
might increase credit constraints for start-ups.

         In this paper, we analyze the impact of foreign bank presence in Central and Eastern
European countries (CEECs) on the rate of firm creation, the size of start-ups and their
survival probability in the initial years. This region is particularly well suited for our study,
because bank credit is the main source of finance for enterprises, and shallow capital markets
cannot provide a substitute for bank loans. At the same time, the banking sector in CEECs
experiences the highest level of foreign bank presence in the world. Firm turnover (entry plus
exit) is a particularly sizable in transition economies, reaching 20.5 percent of total number of
firms (compared to 3-10 percent in industrial countries). Despite high rates of new firm
creation, the firm density with respect to population in most of these economies remains


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below the Western European level and this gap is not closing. Since it has been shown that the
process of creative destruction contributes more to productivity growth in transition
economies than in industrial or developing countries, it is crucial to locate potential barriers to
firm entry and survival (Bartelsman et al., 2004). 3

         Our paper relates to the two streams of literature. First of all, it contributes to the
literature that analyses the impact of foreign bank presence on the supply of credit to small
and medium enterprises. These studies provide ample evidence that foreign-owned banks are
less likely to lend to informationally opaque yet fundamentally sound businesses than
domestically-owned banks (Berger et al., 2001; Berger et al., 2006; Clarke et al., 2005a,
Degryse et al., 2009; Mian, 2006). Most of these papers rely on the data about the share of
small and medium enterprises in banks’ loan portfolios and do not investigate the impact of
foreign bank presence on firm creation.

         Second, our paper is an important addition to the literature that investigates credit
constraints as a barrier to firm entry. A number of papers demonstrates that financial
development is crucial for firm entry and post-entry growth, and this effect is particularly
strong for small firms (Aghion et al., 2007; Guiso and Sapienza, 2004; Klapper et al., 2006).
Moreover, theoretical and empirical papers show that credit constraints diminish the size of
start-ups as they cannot enter with their optimal size. Other papers look at more specific
aspects of financial development, such as bank competition (Bonaccorsi di Patti and
Dell’Ariccia, 2004; Cetorelli and Strahan, 2006). They find that, on average, potential entrants
face greater difficulties in gaining access to credit in more concentrated markets. However,
competition is less favorable to the emergence of new firms in industrial sectors with larger
informational asymmetries.




3
  It has been also documented that entry of new firms is a major source of new jobs and contributes to higher
lower inequality in the region (Berkowitz and Jackson, 2006).

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         To our knowledge, ours is the first paper to investigate firm demographics in emerging
economies, as well as the first paper to study the impact of foreign bank presence on the firm
creation. We attempt to fill this gap and provide consistent evidence that foreign bank
presence has led to lower rate of firm entry in industries characterized by higher informational
asymmetries. From methodological perspective, we enrich the existing literature by offering
two new measures of industry opacity, such as skill dependence and share of small firms.
         Our findings have important policy consequences, because we show that very high
level of foreign bank ownership can be harmful for the start-ups and this negative aspect of
banking liberalization calls for the discussion of measures to lessen credit constraints for
newly established firms. Our paper is complementary to the study of Giannetti and Ongena
(2007) who analyze the impact of foreign bank entry on firm growth in CEECs. They find that
foreign lending stimulates growth in sales, assets and leverage, but the impact is dampened
for small firms. Their study relied on AMADUES database, which contains relatively large
firms, and, therefore, no impact on start-ups or very small firms could be estimated.
         The paper proceeds as follows. In Section 2 we present theoretical considerations.
Section 3 describes our chosen empirical strategy and data. In Section 4 we report stylized
facts and in Section 5 we document our empirical findings. Finally, Section 6 concludes with
policy suggestions.


3     Theoretical considerations

         Theory predicts different impacts of foreign bank entry on credit allocation. Berger et
al. (2000) formulate the global advantage hypothesis, according to which efficiently managed
foreign institutions are able to overcome cross-border disadvantages (distance, monitoring
costs, differences in institutional environment, language, and culture) and operate more
efficiently than their domestic peers. Foreign banks may have higher efficiency when
operating in other nations as they are able to spread their superior managerial skills or best-
practice policies and procedures over more resources, thus lowering costs. Moreover, Claeys
and Hainz (2007) argue that due to their better screening technology, foreign banks have a
comparative advantage in lending to new firms.4 A number of empirical papers provide
support to the global advantage hypothesis and document higher efficiency (Bonin, et al.
2005; Weill, 2003) and profitability (Havrylchyk and Jurzyk, 2007) of foreign banks. More
importantly, De Haas and Lelyveld (2006) show that the supply of loans by foreign banks is
4
  The paper refers to new firm in terms of existing banking relationship but we think that the logic can be
extended to start-ups as well.

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larger and more stable than that of domestic banks, while Giannetti and Ongena (2007) find
that foreign lending stimulates growth in sales, assets and leverage of firms in CEECs. These
theories and empirical evidence lead to the following testable hypothesis.

         H1: Foreign bank presence should have a positive impact on the rate of enterprise
creation in all industries, notwithstanding their opacity.

         Alternatively, there are information based theories that argue that foreign banks have a
comparative advantage in lending based on hard information, such as long credit history and
detailed financial statement information (transaction-based lending), whereas domestic banks
are better placed to lend to firms based on soft information (relationship lending)
(Dell’Ariccia and Marquez, 2004). 5 Foreign banks are also more likely to rely on collateral as
a screening device to contest the incumbent banks’ informational advantage (Sengupta, 2007).
These considerations lead to higher share of transparent borrowers such as large firms in
portfolios of foreign banks, at the expense of opaque yet fundamentally sound businesses.
These theories are supported by ample empirical evidence that illustrates foreign banks’
preference to lend to large transparent enterprises (Berger et al., 2001; Berger et al., 2006;
Clarke et al., 2005a, Degryse et al., 2009; Mian, 2006).
         Besides having a disadvantage in using soft information, foreign banks might be less
willing to do so. This idea is proposed by Stein (2002) and introduced into the banking
literature by Berger et al. (2005). Stein (2002) argues that organizations with more
hierarchical structures are more likely to rely on hard information as opposed to organizations
with flatter structures. The reason is that flatter organizations have better control and
information on their managers, and thus can afford to give them more discretion, which
allows them to use soft information. The modeling in Stein (2002) and Berger et al. (2005)
can be easily extended to foreign banks, which are usually part of large multinational banking
groups, and where communication of soft information is obstructed not only by the hierarchy,
but also by cultural and linguistic barriers. These information based theories lead to the
alternative hypothesis.



5
  Hard and soft information differ with respect to the degree of transferability. Hard information on the one hand
refers to credible and publicly verifiable data, such as firms’ balance sheets, credit history, collateral and
guarantees. On the other hand, soft information cannot be verified by a third person and is gained a result of the
relationship between a bank and a borrower. For example, through repeated interviews with an owner of a young
firm, a bank manager might be convinced that the firm’s owner is a smart, honest and hard working entrepreneur
with a high probability of success. However, this soft information cannot be transferred to other potential lenders
(Petersen, 2004).

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         H2: In the face of foreign bank presence, entry of new firms in opaque industries
should be lower than in transparent ones.


         Even if foreign banks have disadvantages in lending based on hard information, we
might not find support for the hypothesis H2 for at least two reasons. First of all, from the
perspective of public policy, it is not important if foreign banks prefer to target more
transparent clients as long as domestic banks continue to lend to SMEs and start-ups
(Detragiache et al., 2008). Indeed, Dell’Ariccia and Marquez (2004) predict that domestic
banks increase the share of opaque clients in the wake of the foreign bank entry, and Degryse
et al. (2009) find empirical support for this hypothesis.
         Second, new studies question the argument that foreign banks are not capable to lend
to SMEs (Berger and Udell, 2006; Berger et al., 2007; de la Torre et al., 2008). The reasoning
is that latest advances in credit scoring methodologies coupled with enhanced computer
power and increased data availability make transaction lending technologies to be well suited
for funding small firms (Mester, 1997; Petersen and Rajan, 2002). This is especially true
when credit scores are based on the owner’s personal consumer data obtained from consumer
credit bureaus, which is combined with data on the SME collected by financial institutions.
These studies agree that small domestic banks have an advantage to gather and process soft
information, but they argue that large and foreign banks are also able to lend to SMEs, but
using “hard” information-based technologies.


4     Estimation strategy and data

      One implication of the information based theoretical models is that foreign bank entry
should disproportionally benefit firms from industries where informational asymmetries play
a smaller role at the detriment of opaque industries. Therefore, we construct an econometric
model that is inspired by Rajan and Zingales (1998) and that estimates the impact of foreign
bank presence on firm demographics, depending on the degree of opaqueness of industry in
which these firms operate. Formally, this can be presented as follows:

                    ,,                            ,                         ,

                                                                      , ,


                   ,,    includes the following firm demographic statistics: entry, exit, net entry,
survival and churning. Entry/exit rates refer to a number of firms that entered/exited industry

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in country and in year divided by total firms in this industry, country and year. Net entry is
computed as a difference between entry and exit. Survival is computed as a number of firms
that have been created in year                  2 and have survived till time       as a percentage share of
firms in year          2.6 Churning is calculated as a number of firms that are born in time                   but
will exit the market within two next years as a percentage share of total firms in year . The
data on firms’ demographics is taken from the Business Demography Statistic that is provided
by Eurostat. Our data allows us to calculate firms’ demographic indicators with respect to
different firm sizes in term of employee number. Thus, we compute entry, exit, net entry,
survival and churning rates for the firms with 1) no employees, 2) between one and four
employees; 3) between five and nine employees and 4) more than nine employees.

         Our chosen methodology has a number of advantages that have been widely
recognized by researchers that investigate the impact of financial development on economic
growth and, more precisely, the effect of banking sector development on the firm creation
(Bonaccorsi di Patti and Dell’Ariccia, 2004; Cetorelli and Strahan, 2006). This identification
strategy substantially minimizes the risk that our results are driven by reverse causality
(foreign banks enter markets with high firm entry rates), since it is unlikely that banks would
be attracted to a particular market just because one specific industry experienced a relatively
higher rate of firm birth. Moreover, the use of interactions reduces the problem of omitted
variable, such as legal environment, that drives both firm demographics and foreign bank
ownership.

         The key variable in our empirical set-up is a measure of industry opacity, which is
usually measured in the literature by firm age or size. Since we focus on firm creation, we
cannot use firm age because all newly created firms have zero age. Neither can we rely on
size, which is used as a measure of opaqueness only for existing firms because it is related to
the firm history and auditing and disclosure requirements which tend to be tighter with larger
size. Therefore, in order to measure the degree of opaqueness, we rely on the following three
indicators: a ratio of total assets to gross fixed assets, skill dependence, and a share of small
firms in total number of firms. All three indicators assume that adverse selection and moral
hazard problems are relatively more important in some industries, while certain organizational
and technological industry characteristics can help mitigate informational asymmetries.


6
  For robustness purposes, we also compute survival rates after three, four and five years since firm creation. The
findings remain generally unchanged but we prefer to report the results of survival after two years due to higher
number of observations for this measure. The same is true for the measure of churning.

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         Following Bonaccorsi di Patti and Dell’Ariccia (2004), we construct opacity measure
as ratio of total assets to fixed assets                                      . The underlying idea is that a
bank can evaluate more easily the quality of a business plan when it is based on a simple
technology with a large predictable component and where the unobservable quality of human
capital or effort is less important in determining the outcome. Moreover, moral hazard can be
reduced because certain technologies with substantial share of fixed assets imply the
availability of collateral.          The research on rating agencies also shows that there is less
uncertainty in rating firms that have higher share of fixed assets. The above ratio is calculated
from individual firm data contained in the AMADEUS.7 To minimize measurement errors, we
first dropped companies falling in the 5 percent and 95 percent percentiles of the distribution
of our ratios. For robustness, we constructed the opaqueness indicator employing only young
firms, defined as firms younger than 5 years                                                                    ).

         The described measure of opaqueness can cause an identification problem, because it
could be the case that industries characterized by a high share of fixed assets are also those
that have high fixed start-up costs (Bonaccorsi di Patti and Dell’Ariccia, 2004). These firms
might benefit as foreign banks prefer to extend loans to larger firms or they might suffer if for
diversification purposes these banks decide to issue many smaller loans rather than to fund a
small number of large borrowers. If we do not control for this, the negative or positive sign of
the interaction term would capture these developments. Therefore, we introduce a control
variable for start-up costs that equals to the average volume of fixed assets of young firms
(less than five years) in the industry (                              ).

         To test robustness of our results, we propose an alternative measure of opaqueness –
skills or knowledge intensity of industries (                                              ).8 The idea behind
is similar to the previous argument that it is more difficult for a bank to evaluate firms that
operate in industries where there is a relatively greater knowledge component to their value-
added process. Brewer et al. (1996) argue that knowledge assets and R&D-intensive physical

7
  Following Bonaccorsi di Patti and Dell’Ariccia (2004), we calculate opaqueness indicators relying on the local
data for CEECs. This approach is different from that of Rajan and Zingales (1998), who rely on the measure of
financial dependence based on the US data. We argue that the measure of financial dependence is correlated with
financial constraints and therefore a neutral measure of financial dependence requires data from the market with
no credit constraints, such as the US. In our case, share of fixed assets is not endogenous and, therefore, we need
to measure opaqueness in the countries of interest. We test robustness of our results by relying on the UK data,
and we find that opaqueness of industries is highly correlated between countries and our estimations yield
similar results. We additionally find that our results hold even if we rely on financial dependence, instead of
opacity.
8
  This measure of opaqueness was proposed by Wendy Carlin, and we are very grateful to her for this
suggestion.

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assets are highly firm- and industry- specific, thus lowering liquidity value and recovery rates
for a bank. Moreover, availability of knowledge assets increases moral hazard because it
allows more managerial discretion to shift to riskier projects. These theoretical considerations
are supported by empirical evidence of higher financial constraints for firms in knowledge
intensive industries (Gellatly et al., 2004). According to these arguments, we compute an
alternative measure of opaqueness as a ratio of skilled labor to total labor on the industry
level, where skilled employee is defined as one that has completed at least a few years of
college. The data comes from the US Bureau of Labor Statistics.

         Finally, we follow conventional wisdom that small firms are more opaque than big
ones and construct a third proxy for industry opacity: a share of small firms in a total number
of firms (                                      ).9 A firm is considered small if its sales are below 10
percentile of firms’ total sales.10

         The interaction term is the product of opacity in industry                  and a measure for the
degree of foreign bank presence in country and in year . Foreign bank presence is measured
as a share of foreign banks in the total bank capital in country                 and in year    (             ,   ).
The bank is categorized as foreign if more than 50 percent of its capital is controlled by
foreign investors. This information is taken from BankScope, central bank reports or was
kindly provided by central bank officials.

         The initial share (                           ,   ) of each industry   in the local market       at the
beginning of the analyzed period accounts for the fact that firm demographics depend on the
stage of industry development (new, mature, declining, etc). For example, firm entry is going
to be less likely in well developed industries that are growing slowly than in industries that
are at an earlier stage of development. Hence, a negative sign is expected for the coefficient
of this variable. In addition, we include industry, country, year, and size dummies to control
for industry, country, time and size-specific effects, respectively.

      Given data availability, we perform our analysis based on a dataset that includes 52
industries in 9 Central and Eastern Europe (CEE: Bulgaria, Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Romania, Slovakia and Slovenia) for the period 2000-2005.
Appendix A provides a list of included industries.

9
   This measure of opaqueness was proposed by Wendy Carlin, and we are very grateful to her for this
suggestion.
10
   A robustness check was performed with firms’ assets, but the results do not change.

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5     Key stylized facts

      Creation of new firms and exit of old ones is a very sizable phenomenon. Table 2 shows
that on average 12 percent of all firms are new entrants, whereas 8 percent are likely to exit in
a given year. This figure is larger than the firm turnover in developed countries, where the
entry rate is below 6 percent, and interestingly the number of firms that close down often
surpasses the number of entry (Aghion et al., 2007). Higher turnover in transition economies
could be explained by the fact that these countries have started with a small number of private
firms and therefore need to catch-up. Indeed, the average density of firms, measured by a
number of enterprises divided by the population (in 10,000) is still lower in CEE. However,
there is great variation inside the region. In fact, Czech Republic has the highest enterprise
density in Europe, while Bulgaria, Latvia, Lithuania, and Romania have the lowest (Figure
1)11. Thus, higher entry rates of firms in CEECs can be attributed to catching up process. At
the same time, if we compute the density of firm entry (a number of new enterprises divided
by the population in 10,000) , the difference between developed and emerging Europe is not
statistically significant (Figure 2), which suggests that the current rate of new firm creation in
CEECs is not sufficient for caching-up with Western Europe.

      Size is an important dimension in the analysis of firm entry and exit and it alone accounts
for 65 percent of total variance in enterprise entry rates.12 Firms with less than four employees
represent 68 percent, whereas firms with more than 9 employees – 21 percent of total firms
(Figure 3). Not surprisingly, the turnover of firms (entry plus exit rates) is the highest for
small firms and declines rapidly for larger firms, while survival rate increases with the firm
size. Therefore, it is important to investigate the size dimension of firm creation and
destruction.

      Given our empirical methodology that investigates the variation between industries, we
present average entry rates with respect to different industries (Figure 4). As expected, new
industries, such as computer and related activities, experience the fastest entry rates, whereas
manufacturing – the lowest. In Figures 5-7 we rank all industries according to their opacity,
measures as 1) total assets divided by fixed assets 2) share of skilled employees to total
employees and 3) share of small firms. According to the first two definitions of opacity, our
results demonstrate that industries in which the quality of human capital or effort plays the

11
  The results are robust if we compute density measures with respect to active population aged 20-59.
12
  Country and year specific factors account for 17.5 and 16 percent of total variance, respectively, whereas the
contribution of time dimension is negligible.

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decisive role, such as software, hardware, data processing, architectural, research and
development, and advertising, are some of the most informationally opaque sectors. Despite
this, the correlation between these two measures is not very high (38 percent), and some
industries appear to be opaque according to the first measure (cleaning, construction), but
completely transparent according to the second one. When we measure opacity as a share of
small firms, we see that it is very little correlated with other measures of opacity, but our
findings that legal services and internet retail services are categorized as the most opaque
industries are in line with conventional wisdom. Small correlation between our three measures
of opacity shows that these indicators describe different aspects of informational asymmetries.

6     Empirical findings

         We report the finding of the baseline model in Tables 3-5. Our results provide support
to the hypothesis H2 that foreign bank entry has a negative impact on firm creation in more
informationally opaque industries. The interaction coefficient is negative in all models with
the entry rate as dependant variable, notwithstanding the definition of opacity. This result is
robust if we control for exit rate that should account for the “administrative turnover” of firms
that change their legal status and, therefore, appear both in entry and exit (Bonaccorsi di Patti
and Dell’Ariccia, 2004). The coefficient for exit variable is significant and positive, indicating
that higher entry rate is correlated with higher exit rates. Given the problem that industries
characterized by a high share of fixed assets are also those that have high fixed start-up costs,
we also control for these entry costs (Table 4). The coefficient of the interaction with entry
costs almost never achieves significance and its inclusion does not modify our baseline
results. Therefore, we can rule out an explanation that foreign bank entry led to changes in
entry rates of firms in industries, depending on the size of their start-up costs. The hypothesis
H2 is also confirmed by the model with net-entry as dependant variable. This finding is
additionally driven by the higher rate of firm exit from more opaque industries in the wake of
foreign bank entry, which could be a sign of decreased connected lending (Giannetti and
Ongena, 2007).

      Next, we address the issue of whether foreign bank presence has a different impact on
survival and churning of firms. Our results depend on the definition of opacity. If we measure
opacity in terms of fixed assets, we find a negative effect on firm survival, but no effect on
churning (Table 3). However, if our measure of opacity relies on skill dependence or
prevalence of small firms in the industry, we find no effect of foreign bank presence on firm


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survival but a negative impact on firm churning (Table 5). The definition of churning implies
its increase when entry rate goes up and its decrease when survival rate picks up. Therefore,
the decrease of churning must be the consequence of the suppressed entry. Our results
contrast with the work of Giannetti and Ongena (2007), who find that foreign bank entry
spurs both entry and exit, and thus churning. This difference is likely to be due to data issues,
because their study relied on AMADEUS firm level data to calculate entry and exit of firms,
whereas we have actual data on firm demographics.

      Since we rely on a difference-in-difference estimation, it is worth pointing out what the
coefficients mean in terms of economic significance. Take an electricity industry which is at
the 25th percentile of opacity and database activities, which are at 75th percentile, according to
the definition of opacity in terms of fixed assets. The coefficient suggests that the difference
in entry rates between electricity and database industries in Lithuania (which is at the 75th
percentile in terms of foreign bank presence which amounts to 84 percent of total banking
assets) is 0.4 percentage points higher than the difference in entry rates between these same
industries in Slovenia (which is at the 25th percentile in terms of foreign bank presence with
58 percent of total banking assets controlled by foreign banks). In other words, moving from
Lithuania to Slovenia would benefit an opaque industry, like database activities, relatively
more than a transparent one. As a comparison, this observed change amounts to 3 percent of
the mean difference in entry rates between these industries across all countries, which reaches
15 percent. This effect can be considered quite negligible. However, if we compute the impact
on net entry, we find that the difference between opaque and transparent industries in
Lithuania is 0.5 percentage points higher than in Slovenia, which amounts to 5 percent of the
mean difference between industries. Moreover, if we look at the 10th and 90th percentile, the
difference amounts to 17 percent of the mean difference in net entry rates, an economically
significant effect. Economic significance is very similar when industry opacity is measured in
terms of skill dependence, but is rather smaller when industry opacity is proxied by the share
of small firms.

      In the following specifications we allow the coefficient of the interaction term between
foreign presence and industry opacity to vary according to the firm size. The results are
presented in Tables 6-7. Notwithstanding the definition of opacity, we obtain very similar
results for firms of all sizes. Foreign bank presence has led to lower firm entry and higher
firm exit in all size categories. The coefficients for firms of different sizes do not differ
between each other in statistically significant manner. In turn, lower entry has mostly

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diminished churning of firms despite some evidence of shorter survival period of new firms
(at least if opacity is measured in fixed assets ratio).

      The only exception constitute firms with no employees, for which we find no effect or
even a positive effect on churning. These results are driven by sample problems, because data
on firm survival and churning is always available with a lag. Since our measure of churning
takes into account survival of firms three years after their entry, we lack observation for the
three last years of the analyzed period. Therefore, we rerun regressions from Table 6 only for
the years for which we have data on churning. New findings are presented in Table 8 and they
show evidence that foreign bank presence has increased entry of firms with no employees,
which explains the positive effect on churning of these firms. These results allow us to
conclude that foreign investors preferred to finance creation of individual entrepreneurs rather
than firms. This might reflect some of the SME lending technologies which rely on credit
scores that are based on the owner’s personal consumer data obtained from consumer credit
bureaus (Berger and Udell, 2006). These finding are also in line with the previous literature
that finds that credit constraints diminish the size of start-ups because new firms cannot enter
at their optimal size (Evans and Jovanovic, 1989; Colombo and Grilli, 2005; Holtz-Eakin et
al., 1994). Still, this finding should be treated with caution, because it disappears when all
available sample is analyzed or alternative definition of opacity is used.

      The entry of foreign banks in CEECs happened only when authorities have liberalized
entry rules for foreign institutions. It could be hypothesizes that all types of entry regulation
could have been liberalized at the same time. To control for this, we include additional
interaction variable between an indicator that measures the ease of starting a new business and
a natural rate of entry in absence of all entry barriers. Results, reported in Table 9, are robust
to the inclusion of this variable. Moreover, we see that financial development appears to be
more important than entry regulation for the creation of new firms.




7     Conclusions

      While foreign banks have contributed to the increased loan supply to the Central and
Eastern European economies, there is little evidence about whether all borrowers benefited
equally. A number of theoretical papers argue that foreign banks have a comparative
advantage in lending to transparent firms, whereas domestic banks are better suited to engage


                                                             14
Financial Systems, Efficiency and Stimulation of Sustainable Growth     Working Paper   FINESS.D.5.2




in “relationship lending” and lend to opaque borrowers. Given that start-ups are the most
opaque clients, we are interested to investigate whether they gained or lost from the presence
of foreign banks.

      Our analysis provides a few interesting conclusions. First, the entry rate is lower in
industries characterized by higher informational asymmetries than in more transparent ones.
This impact is economically significant and is consistent with theories that emphasize the role
of domestic banks in servicing opaque firms, including start-ups. Second, we find mixed
evidence about firm survival and churning. But our results still allow us to conclude that
foreign bank presence leads to diminished churning of firms or more limited process of
“creative destruction”.

      Our results provide important policy implications because they show that foreign bank
entry can be harmful for the creation of new firms in industries with higher informational
asymmetries. By definition, these industries possess high levels of knowledge and skill
intensity, such as new information technologies and, therefore, are crucial for future growth.
This negative aspect should be considered along positive consequences of foreign bank entry,
such as the increased and more stable supply of lending to larger firms. If foreign banks have
a massive presence in the country, different ways to support entrepreneurship should be
explored, such as venture-capital funds or state funds to assist small and medium enterprises
as well as start-ups.




                                                             15
Financial Systems, Efficiency and Stimulation of Sustainable Growth       Working Paper   FINESS.D.5.2




References

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                                                             17
                                                     Birth rate
                                             0   5     10       15   20

                               Romania
                        United Kingdom
                                Portugal




     Source: Eurostat
                               Denmark
                                Bulgaria
                                   Latvia
                                                                          Figure1. Enterprise entry rate.




                           Luxembourg
                                 Estonia
                                   Spain
                              Germany
                            Netherlands
                                  France
                               Lithuania




18
                                                                                                            Financial Systems, Efficiency and Stimulation of Sustainable Growth




                                Hungary
                               Slovenia
                        Czech Republic
                                 Finland
                                  Austria
                                     Italy
                                Slovakia
                                 Cyprus
                                Sweden
                            Switzerland
                                   Malta
                                                                                                            Working Paper
                                                                                                            FINESS.D.5.2
                                                       Enterprise density
                                             0   200       400      600     800

                        Czech Republic
                                Portugal
                                   Spain




     Source: Eurostat
                                     Italy
                                   Malta
                                Sweden
                                                                                  Figure 2. Enterprise density




                                 Cyprus
                                Hungary
                                Slovakia
                           Luxembourg
                               Slovenia
                                 Finland
                                 Estonia




19
                                                                                                                 Financial Systems, Efficiency and Stimulation of Sustainable Growth




                            Switzerland
                            Netherlands
                               Denmark
                                  Austria
                                  France
                              Germany
                        United Kingdom
                                Bulgaria
                                   Latvia
                               Romania
                               Lithuania
                                                                                                                 Working Paper
                                                                                                                 FINESS.D.5.2
                                                 Enterprise birth density
                                             0          50                100

                                Portugal
                        Czech Republic
                                   Spain




     Source: Eurostat
                           Luxembourg
                                     Italy
                                Hungary
                                 Estonia
                               Denmark
                                                                                Figure 3. Enterprise entry density.




                                Sweden
                        United Kingdom
                                 Cyprus
                               Slovenia
                                Slovakia




20
                                                                                                                      Financial Systems, Efficiency and Stimulation of Sustainable Growth




                                 Finland
                            Netherlands
                                Bulgaria
                               Romania
                              Germany
                                  France
                                   Latvia
                                  Austria
                               Lithuania
                            Switzerland
                                   Malta
                                                                                                                      Working Paper
                                                                                                                      FINESS.D.5.2
Financial Systems, Efficiency and Stimulation of Sustainable Growth                                                              Working Paper   FINESS.D.5.2




Figure 4. Enterprises of different sizes as a share of the total number of enterprises.

   100%
    90%
    80%
    70%
    60%
    50%
    40%                                                                                                     More than 10 employees
    30%                                                                                                     5-9 employees
    20%
                                                                                                            1-4 employees
    10%
     0%                                                                                                     0 employees
              Bulgaria




                                                              Latvia
                                                    Hungary
                         Czech Republic

                                          Estonia




                                                                       Romania

                                                                                 Slovenia

                                                                                            Slovakia




                                                                                                       21
                                                                                       Birth rate
                                                                                   0   10           20

                                                                    Data base
                                                                     Hardware
                                                                  Recruitment
                                                              Other computer
                                                                           Post
                                                                   Recreation
                                                             Data processing
                                                               Misc. business
                                                               Legal activities
                                                  Renting of office machinery
                                                                   Real estate




     Source: Eurostat and authors' calculations
                                                                      Software
                                                               Other services
                                                                   Advertising
                                                        Telecommunications
                                                           Retail not in stores
                                                                      Cleaning
                                                                       Security
                                                                          R&D
                                                                  Construction
                                                                    Wholesale
                                                                         Hotels
                                                                         Travel
                                                             Transport: water




22
                                                                 Transport: air
                                                                                                                                                                           Financial Systems, Efficiency and Stimulation of Sustainable Growth




                                                                  Architectural
                                                         Repair of machinery
                                                                  Restaurants
                                                                          Metal
                                                                     Technical
                                                                         Wood
                                                  Retail in specialized stores
                                                                                                         Figure 4. Firm entry rates with respect to different industries




                                                                        Textile
                                                              Transport: land
                                                                       Sewage
                                                                         Paper
                                                          Coke and petrolium
                                                   Manufacturing of transport
                                                                  Mining other
                                                                Mining energy
                                                              Sale of vehicles
                                                                 Retail of food
                                                               Retail in stores
                                                                     Electricity
                                                              Repair of goods
                                                                                                                                                                           Working Paper




                                                                       Rubber
                                                                    Machinery
                                                                        Electric
                                                                          Food
                                                                       Leather
                                                                         Water
                                                                                                                                                                           FINESS.D.5.2
                                                                             Opacity: total assets/fixed assets
                                                                              0                          10

                                                                    Wholesale
                                                                  Recruitment
                                                                      Security
                                                                   Advertising
                                                              Other computer
                                                                    Hardware
                                                                      Software
                                                             Data processing
                                                                                                                  divided by fixed assets




                                                                  Architectural
                                                          Retail not in stores




     Source: Eurostat and authors' calculations
                                                                        Travel
                                                                  Construction
                                                               Misc. business
                                                                    Data base
                                                                      Cleaning
                                                                       Electric
                                                        Repair of machinery
                                                                          R&D
                                                                         Paper
                                                             Sale of vehicles
                                                                           Post
                                                                     Technical
                                                             Transport: water
                                                             Repair of goods




23
                                                                    Machinery
                                                                                                                                                                                                             Financial Systems, Efficiency and Stimulation of Sustainable Growth




                                                              Retail in stores
                                                                 Transport: air
                                                         Coke and petrolium
                                                                       Leather
                                                                   Recreation
                                                                         Metal
                                                                        Textile
                                                        Telecommunications
                                                   Manufacturing of transport
                                                                 Retail of food
                                                               Legal activities
                                                                       Rubber
                                                                     Electricity
                                                                         Wood
                                                                      Sewage
                                                                  Mining other
                                                                   Real estate
                                                                         Water
                                                                Mining energy
                                                                          Food
                                                                                                                                                                                                             Working Paper




                                                  Renting of office machinery
                                                              Transport: land
                                                               Other services
                                                                  Restaurants
                                                                        Hotels
                                                                                                                                                                                                             FINESS.D.5.2




                                                                                                                  Figure 5. Ranking of industries according to their opacity, measured by the total assets
                                                                                   Opacity: knowlege intensity
                                                                                   0                     100

                                                                      Software
                                                                    Hardware
                                                                          R&D
                                                                  Architectural
                                                              Other computer
                                                             Data processing
                                                                    Data base
                                                                     Technical
                                                               Legal activities
                                                                   Advertising




     Source: Eurostat and authors' calculations
                                                                 Transport: air
                                                        Telecommunications
                                                                       Electric
                                                                Mining energy
                                                               Misc. business
                                                                     Electricity
                                                                                                                 skilled employees to total employees




                                                                   Real estate
                                                                    Wholesale
                                                                      Security
                                                                   Recreation
                                                             Transport: water
                                                          Retail not in stores
                                                         Coke and petrolium




24
                                                                         Water
                                                                                                                                                                                                               Financial Systems, Efficiency and Stimulation of Sustainable Growth




                                                  Renting of office machinery
                                                              Transport: land
                                                                        Travel
                                                              Retail in stores
                                                                    Machinery
                                                                  Recruitment
                                                   Manufacturing of transport
                                                             Sale of vehicles
                                                        Repair of machinery
                                                             Repair of goods
                                                                        Hotels
                                                                      Sewage
                                                                 Retail of food
                                                                           Post
                                                                         Metal
                                                                         Paper
                                                                       Rubber
                                                                  Construction
                                                                  Mining other
                                                                         Wood
                                                                                                                                                                                                               Working Paper




                                                                  Restaurants
                                                                          Food
                                                                        Textile
                                                                       Leather
                                                                      Cleaning
                                                                                                                                                                                                               FINESS.D.5.2




                                                                                                                 Figure 6. Ranking of industries according to their opacity, measured by the share of highly
                                                                                   Opacity: share of small firms
                                                                                   0                         .2

                                                               Legal activities
                                                          Retail not in stores
                                                             Repair of goods
                                                               Other services
                                                  Renting of office machinery
                                                                          R&D
                                                                                                                   firms to total firms




                                                                Mining energy
                                                                   Real estate
                                                             Data processing
                                                                  Recruitment




     Source: Eurostat and authors' calculations
                                                              Retail in stores
                                                               Misc. business
                                                                    Hardware
                                                                  Restaurants
                                                                      Software
                                                                  Architectural
                                                        Repair of machinery
                                                                      Cleaning
                                                                   Recreation
                                                                    Data base
                                                                        Hotels
                                                              Transport: land
                                                                 Retail of food
                                                                   Advertising




25
                                                        Telecommunications
                                                                                                                                                                                                                Financial Systems, Efficiency and Stimulation of Sustainable Growth




                                                                         Wood
                                                                        Travel
                                                             Sale of vehicles
                                                                           Post
                                                                     Technical
                                                                        Textile
                                                                  Construction
                                                                         Paper
                                                                  Mining other
                                                              Other computer
                                                                       Electric
                                                                          Food
                                                                    Wholesale
                                                                 Transport: air
                                                                      Security
                                                             Transport: water
                                                                         Metal
                                                                       Leather
                                                                       Rubber
                                                   Manufacturing of transport
                                                                                                                                                                                                                Working Paper




                                                                      Sewage
                                                                         Water
                                                                    Machinery
                                                                     Electricity
                                                         Coke and petrolium
                                                                                                                                                                                                                FINESS.D.5.2




                                                                                                                   Figure 7. Ranking of industries according to their opacity, measured by the share of small
Financial Systems, Efficiency and Stimulation of Sustainable Growth                          Working Paper   FINESS.D.5.2




Table 1. Description of variables

Variable             Definition                                                                   Data source

Demographic variables
Entryijt            Number of firms that entered industry in country and in year                  Business
                    divided by total firms in this industry, country and year.                    Demography
                                                                                                  Statistic (BDS) of
                                                                                                  Eurostat
Exitijt                  Number of firms that exited industry in country and in year              BDS of Eurostat
                         divided by total firms in this industry, country and year.
Net entryijt             Difference between entry and exit.                                       BDS of Eurostat
Survivalijt              Number of firms that have been created in year        3 and have         BDS of Eurostat
                         survived till time as a percentage share of firms in year      3.
Churningijt              Number of firms that enter in time but will exit the market              BDS of Eurostat
                         within three next years in percent of total firms in year .
Firm density             Number of enterprises divided by the population (in 10,000).             BDS of Eurostat

Industry level variables
Opacity( fixed         An average ratio of total assets to fixed assets for an industry i.        Amadeus
assets)i
Opacity( fixed         An average ratio of total assets to fixed assets for an industry i,        Amadeus
assets of young        computed only for firms that are less than 5 years old.
firms)i
Opacity( skill         Ratio of skilled labor to total labor, where skilled employee is           US Bureau of Labor
dependence)i           defined as one that has completed at least a few years of college.         Statistics.
Opacity (small         Share of small firms in a total number of firms. A firm is                 Amadeus
firms)i                considered small if its sales are below 10 percentile of firms’ total
                       sales.
Entry costsi           Average volume of fixed assets of young firms (less than five              Amadeus
                       years) in the industry.
Initial sharei         The initial share of each industry in the local market at the              Amadeus
                       beginning of the analyzed period
Naturali               Entry rate in industry i in the UK.                                        BDS of Eurostat

Country level variables
Foreignjt             Foreign bank entry is measured as a share of foreign banks in the           BankScope and own
                      total bank capital in country and in year                                   calculations
Start costsjt         An indicator that evaluates the freedom (time and costs) of                 Fraser Institute
                      starting a new business, where indicator ranges from 0 (the least
                      free) to 10 (the most free).




                                                             26
Financial Systems, Efficiency and Stimulation of Sustainable Growth                    Working Paper   FINESS.D.5.2




Table 2. Summary statistics

                                            Obs Mean            St.dev.
Entry rate (in percent)

Total                                     2503 12.00            7.57
No employees                              2400 20.28            17.14
1 – 4 employees                           2455 12.07            9.77
5 – 9 employees                           2393 6.09             8.36
More than 9 employees                     2391 3.08             4.46

Exit rate (in percent)

Total                                     2236 8.49             4.38
No employees                              2146 17.20            14.12
1 – 4 employees                           2195 8.05             7.32
5 – 9 employees                           2142 3.20             5.06
More than 9 employees                     2155 1.78             2.60

Net entry rate (in percent)

Total                                     2229 3.85             7.73
No employees                              2129 4.05             20.70
1 – 4 employees                           2176 4.28             11.55
5 – 9 employees                           2111 3.07             9.87
More than 9 employees                     2109 1.33             4.53

Survival rate (in percent)

Total                                     1508 75.75            14.15
No employees                              1372 67.76            20.14
1 – 4 employees                           1457 82.49            14.80
5 – 9 employees                           1190 88.33            16.35
More than 9 employees                     1163 87.24            19.06

Churning rate (in percent)

Total                                     1090 3.35             3.37
No employees                                983 8.67            11.97
1 – 4 employees                             136 0.45            0.58
5 – 9 employees                             849 0.82            1.72
 More than 9 employees                   836 0.57           1.31
Entry/exit rates refer to a number of firms that entered/exited industry in country and in year divided by total
firms in this industry, country and year. Net entry is computed as a difference between entry and exit. Survival is
computed as a number of firms that have been created in year        2 and have survived till time as a percentage
share of firms in year      2. Churning is calculated as a number of firms that are born in time but will exit the
market within two next years as a percentage share of total firms in year .




                                                             27
Financial Systems, Efficiency and Stimulation of Sustainable Growth                               Working Paper   FINESS.D.5.2




Table 3. Impact of foreign bank presence on firm demographics, when opacity is measured in terms of fixed
assets.

                                        Entry           Entry           Exit            Net entry       Survival        Churning


Panel A
Initial industry share                  -0.009          -0.092          0.090           -0.083          0.022           -0.013
                                                                  **
                                        (0.851)         (0.031)         (0.194)         (0.306)         (0.912)         (0.949)
Foreign*opacity(fixed assets)           -0.008          -0.005          0.008           -0.009          -0.026          -0.006
                                        (0.000)***      (0.000) ***     (0.000) ***     (0.000) ***     (0.013) **      (0.188)
Exit                                                    0.578
                                                        (0.000) ***
Constant                                9.068           5.868           -0.803          2.671           89.632          4.572
                                        (0.000) ***     (0.000) ***     (0.549)         (0.130)         (0.000)***      (0.204)
Observations                            5037            4922            4660            4564            2586            1613
R-squared                               0.094           0.424           0.078           0.113           0.242           0.146


Panel B
Initial industry share                  -0.011          -0.093          0.092           -0.085          0.024           -0.014
                                                                  **
                                        (0.827)         (0.030)         (0.182)         (0.293)         (0.902)         (0.945)
Foreign*opacity(fixed assets            -0.007          -0.005          0.008           -0.008          -0.022          -0.006
                                                  ***             ***             ***             ***             **
for young firms)                        (0.000)         (0.001)         (0.000)         (0.000)         (0.026)         (0.164)
Exit                                                    0.578
                                                        (0.000) ***
Constant                                8.839           5.710           -0.671          2.321           52.349          4.446
                                                  ***             ***                                             ***
                                        (0.000)         (0.000)         (0.613)         (0.184)         (0.000)         (0.217)
Observations                            5037            4922            4660            4564            2586            1613
R-squared                               0.093           0.424           0.078           0.112           0.241           0.146




                                                             28
Financial Systems, Efficiency and Stimulation of Sustainable Growth                                     Working Paper    FINESS.D.5.2




Table 4. Impact of foreign bank presence on firm demographics (opacity: assets/fixed assets, controlling for
entry costs).

                                        Entry           Entry           Exit            Net entry       Survival        Churning


Panel A
Initial industry share                  -0.008          -0.092          0.089           -0.081          0.027           -0.013
                                        (0.864)         (0.031) **      (0.197)         (0.317)         (0.889)         (0.951)
Foreign*opacity (fixed assets)          -0.008          -0.005          0.008           -0.010          -0.027          -0.006
                                                  ***             ***             ***             ***             ***
                                        (0.000)         (0.000)         (0.000)         (0.000)         (0.010)         (0.185)
Entry costs                             -0.000          0.000           0.000           -0.000          -0.000          -0.000
                                        (0.677)         (0.978)         (0.741)         (0.476)         (0.337)         (0.913)
Exit                                                    0.578
                                                        (0.000) ***
Constant                                15.842          10.032          -1.412          6.735           90.709          4.153
                                        (0.000) ***     (0.000) ***     (0.520)         (0.004) *** (0.000) *** (0.102)
Observations                            5037            4922            4660            4564            2586            1613
R-squared                               0.094           0.424           0.078           0.113           0.242           0.146


Panel B
Initial industry share                  -0.010          -0.093          0.092           -0.083          0.030           -0.014
                                                                  **
                                        (0.837)         (0.030)         (0.184)         (0.302)         (0.879)         (0.947)
Foreign*opacity(fixed assets            -0.007          -0.005          0.008           -0.008          -0.023          -0.006
                                                  ***             ***             ***             ***             **
for young firms)                        (0.000)         (0.001)         (0.000)         (0.000)         (0.021)         (0.162)
Entry costs                             -0.000          0.000           0.000           -0.000          -0.000          -0.000
                                        (0.754)         (0.917)         (0.817)         (0.535)         (0.361)         (0.931)
Exit                                                    0.578
                                                        (0.000) ***
Constant                                15.836          9.958           -1.744          6.491           88.509          4.134
                                                  ***             ***                             ***             ***
                                        (0.000)         (0.000)         (0.440)         (0.007)         (0.000)         (0.103)
Observations                            5037            4922            4660            4564            2586            1613
R-squared                               0.094           0.424           0.078           0.113           0.242           0.146




                                                                 29
Financial Systems, Efficiency and Stimulation of Sustainable Growth                                   Working Paper      FINESS.D.5.2




Table 5. Impact of foreign bank presence on firm demographics, when opacity is measured in terms of skill
dependence and share of small firms.

                                               Entry           Entry           Exit            Net entry       Survival        Churning


Panel A
Initial industry share                         -0.002          -0.086          0.084           -0.075          0.084           -0.018
                                               (0.970)         (0.042) **      (0.222)         (0.353)         (0.666)         (0.931)
Foreign*opacity(skill dependence)              -0.001          -0.001          0.001           -0.001          -0.001          -0.001
                                                         ***             ***             ***             ***
                                               (0.000)         (0.000)         (0.001)         (0.000)         (0.212)         (0.036) **
Exit                                                           0.575
                                                               (0.000)***
Constant                                       15.613          8.946           1.294           7.881           32.333          10.048
                                                         ***             ***                             ***             ***
                                               (0.000)         (0.000)         (0.482)         (0.000)         (0.000)         (0.032) **
Observations                                   4953            4843            4590            4496            2533            1588
R-squared                                      0.095           0.421           0.078           0.117           0.244           0.147


Panel B
Initial industry share                         0.011           -0.038          0.070           -0.065          0.066           0.028
                                               (0.766)         (0.301)         (0.099)*        (0.419)         (0.721)         (0.873)
Foreign*opacity(share of small firms)          -0.318          -0.214          0.496           -0.586          -0.607          -0.530
                                               (0.000) ***     (0.016) **      (0.000) *** (0.000) *** (0.288)                 (0.032) **
Exit                                                           0.186
                                                               (0.000)***
Constant                                       17.387          15.749          7.946           5.956           44.437          8.829
                                                         ***             ***             ***             ***             ***
                                               (0.000)         (0.000)         (0.000)         (0.000)         (0.000)         (0.004) ***
Observations                                   5037            4922            4660            4564            2586            1613
R-squared                                      0.509           0.540           0.582           0.128           0.338           0.404




                                                               30
Financial Systems, Efficiency and Stimulation of Sustainable Growth                                 Working Paper    FINESS.D.5.2




Table 6. Impact of foreign bank presence on firm demographics by size (opacity: assets/fixed assets).

                                            Entry           Entry           Exit            Net entry       Survival        Churning


Panel A
Initial industry share                      0.002           -0.045          0.088           -0.083          0.002           0.044
                                                                                      **
                                            (0.964)         (0.217)         (0.027)         (0.305)         (0.993)         (0.764)
Foreign*opacity(fixed assets) 0             -0.006          -0.004          0.017           -0.008          -0.028          0.011
                                                      ***             **              ***             **              ***
                                            (0.003)         (0.014)         (0.000)         (0.024)         (0.009)         (0.057) *
Foreign*opacity(fixed assets) 1-4           -0.011          -0.005          0.009           -0.009          -0.019          -0.063
                                                      **                              **                              *
                                            (0.015)         (0.267)         (0.012)         (0.165)         (0.079)         (0.000) ***
Foreign*opacity(fixed assets) 5-9           -0.007          -0.004          0.007           -0.009          -0.023          -0.016
                                                      ***             ***             ***             ***             **
                                            (0.000)         (0.002)         (0.000)         (0.000)         (0.029)         (0.000) ***
Foreign*opacity(fixed assets) >9            -0.007          -0.005          0.007           -0.010          -0.029          -0.017
                                                      ***             ***             ***             ***             **
                                            (0.000)         (0.001)         (0.000)         (0.000)         (0.014)         (0.000) ***
Exit                                                        0.187
                                                            (0.000) ***
Constant                                    14.447          13.216          4.496           3.363           80.075          3.748
                                                      ***             ***             ***             *               ***
                                            (0.000)         (0.000)         (0.000)         (0.074)         (0.000)         (0.232)
Observations                                5037            4922            4660            4564            2586            1613
R-squared                                   0.510           0.541           0.589           0.128           0.340           0.429


Panel B
Initial industry share                      0.001           -0.046          0.091           -0.086          0.003           0.046
                                            (0.980)         (0.210)         (0.021) **      (0.292)         (0.985)         (0.752)
Foreign*opacity                             -0.005          -0.004          0.016           -0.007          -0.026          0.010
                                                      ***             **              ***             **              **
(fixed assets for young firms) 0            (0.003)         (0.014)         (0.000)         (0.031)         (0.011)         (0.053) *
Foreign*opacity                             -0.011          -0.005          0.009           -0.008          -0.017          -0.060
(fixed assets for young firms) 1-4          (0.011) **      (0.217)         (0.009) ***     (0.161)         (0.104)         (0.000) ***
Foreign*opacity                             -0.005          -0.003          0.007           -0.008          -0.018          -0.016
                                                      ***             **              ***             ***             *
(fixed assets for young firms) 5-9          (0.000)         (0.013)         (0.000)         (0.001)         (0.069)         (0.000) ***
Foreign*opacity                             -0.006          -0.004          0.006           -0.009          -0.022          -0.017
(fixed assets for young firms) >9           (0.000) ***     (0.002) ***     (0.000) ***     (0.000) ***     (0.042) **      (0.000) ***
Exit                                                        0.187
                                                            (0.000) ***
Constant                                    14.333          13.201          4.656           3.154           78.596          3.764
                                            (0.000) ***     (0.000) ***     (0.000) ***     (0.092) *       (0.000) ***     (0.231)
Observations                                5037            4922            4660            4564            2586            1613
R-squared                                   0.510           0.541           0.590           0.127           0.340           0.429




                                                              31
Financial Systems, Efficiency and Stimulation of Sustainable Growth                                     Working Paper   FINESS.D.5.2




Table 7. Impact of foreign bank presence on firm demographics by size(opacity is measured in terms of skill
dependence and share of small firms).

                                              Entry           Entry           Exit            Net entry       Survival        Churning


Panel A
Initial industry share                        0.007           -0.040          0.080           -0.076          0.069           0.016
                                                                                        *
                                              (0.835)         (0.275)         (0.057)         (0.349)         (0.707)         (0.925)
Foreign*opacity(skill dependence) 0           -0.001          -0.000          0.001           -0.001          -0.001          0.000
                                              (0.000) ***     (0.004) *** (0.000) *** (0.025) **              (0.448)         (0.476)
Foreign*opacity(skill dependence) 1-4 -0.001                  -0.000          0.001           -0.000          0.000           -0.005
                                              (0.131)         (0.894)         (0.162)         (0.750)         (0.964)         (0.002) ***
Foreign*opacity(skill dependence) 5-9 -0.001                  -0.001          0.001           -0.001          -0.002          -0.002
                                              (0.000) ***     (0.000) *** (0.000) *** (0.000) ***             (0.160)         (0.000) ***
Foreign*opacity(skill dependence) >9          -0.001          -0.001          0.001           -0.001          -0.004          -0.002
                                                        ***             ***             ***             ***             ***
                                              (0.000)         (0.000)         (0.000)         (0.000)         (0.005)         (0.000) ***
Exit                                                          0.184
                                                              (0.000) ***
Constant                                      20.456          16.896          7.985           7.223           25.597          12.769
                                                        ***             ***             ***             ***             ***
                                              (0.000)         (0.000)         (0.000)         (0.001)         (0.007)         (0.001) ***
Observations                                  4953            4843            4590            4496            2533            1588
R-squared                                     0.509           0.538           0.585           0.134           0.348           0.426


Panel B
Initial industry share                        0.011           -0.036          0.070           -0.066          0.067           0.022
                                              (0.767)         (0.320)         (0.105)         (0.417)         (0.716)         (0.901)
Foreign*opacity(small firms) 0                -0.245          -0.134          0.771           -0.528          -0.980          0.048
                                                        **                              ***             **
                                              (0.039)         (0.253)         (0.000)         (0.016)         (0.100)         (0.900)
Foreign*opacity(small firms) 1-4              -0.547          -0.131          0.596           -0.549          -0.236          -2.220
                                                        *                               **
                                              (0.081)         (0.661)         (0.018)         (0.201)         (0.686)         (0.054) *
Foreign*opacity(small firms) 5-9              -0.451          -0.332          0.358           -0.698          -0.234          -1.002
                                                        ***             ***             ***             ***
                                              (0.000)         (0.000)         (0.000)         (0.000)         (0.723)         (0.000) ***
Foreign*opacity(small firms) >9               -0.280          -0.155          0.354           -0.526          -0.933          -1.020
                                                        ***                             ***             ***
                                              (0.005)         (0.120)         (0.000)         (0.001)         (0.206)         (0.000) ***
Exit                                                          0.185
                                                              (0.000) ***
Constant                                      17.120          15.473          7.033           5.777           45.918          6.533
                                                        ***             ***             ***             ***             ***
                                              (0.000)         (0.000)         (0.000)         (0.001)         (0.000)         (0.047) **
Observations                                  5037            4922            4660            4564            2586            1613
R-squared                                     0.510           0.541           0.585           0.128           0.340           0.413




                                                               32
Financial Systems, Efficiency and Stimulation of Sustainable Growth                              Working Paper    FINESS.D.5.2




Table 8. Impact of foreign bank presence on firm demographics by size for the period 2000-2002 (opacity:
assets/fixed assets)

                                              Entry           Entry           Exit           Net entry       Churning


Panel A
Initial industry share                        -0.000          -0.002          0.102          0.083           0.044
                                              (0.999)         (0.962)         (0.147)        (0.492)         (0.764)
Foreign*opacity(fixed assets) 0               0.005           0.005           0.016          -0.006          0.011
                                              (0.093) *       (0.140)         (0.000) ***    (0.381)         (0.057) *
Foreign*opacity(fixed assets) 1-4             -0.011          -0.011          0.007          -0.062          -0.063
                                                                                                       ***
                                              (0.468)         (0.473)         (0.653)        (0.004)         (0.000) ***
Foreign*opacity(fixed assets) 5-9             -0.007          -0.006          0.002          -0.021          -0.016
                                              (0.014) **      (0.013) **      (0.405)        (0.000) ***     (0.000) ***
Foreign*opacity(fixed assets) >9              -0.007          -0.007          0.001          -0.020          -0.017
                                                        ***             ***                            ***
                                              (0.004)         (0.005)         (0.809)        (0.000)         (0.000) ***
Exit                                                          0.207
                                                              (0.000) ***
Constant                                      20.766          13.859          6.272          8.942           3.748
                                                        ***             ***
                                              (0.000)         (0.000)         (0.330)        (0.201)         (0.232)
Observations                                           1432            1422           1598            1562            1613
R-squared                                     0.671           0.691           0.628          0.253           0.429


Panel B
Initial industry share                        -0.001          -0.003          0.104          0.080           0.046
                                              (0.986)         (0.941)         (0.136)        (0.509)         (0.752)
Foreign*opacity                               0.006           0.005           0.016          -0.004          0.010
(fixed assets for young firms) 0              (0.044) **      (0.094)*        (0.000) ***    (0.550)         (0.053) *
Foreign*opacity                               -0.014          -0.014          0.006          -0.060          -0.060
                                                                                                       ***
(fixed assets for young firms) 1-4            (0.326)         (0.304)         (0.675)        (0.003)         (0.000) ***
Foreign*opacity                               -0.005          -0.005          0.002          -0.018          -0.016
                                                        **              **                             ***
(fixed assets for young firms) 5-9            (0.047)         (0.040)         (0.453)        (0.000)         (0.000) ***
Foreign*opacity                               -0.007          -0.006          0.000          -0.018          -0.017
                                                        ***             ***                            ***
(fixed assets for young firms) >9             (0.006)         (0.007)         (0.897)        (0.000)         (0.000) ***
Exit                                                          0.206
                                                              (0.000) ***
Constant                                      20.552          13.784          6.017          8.585           3.764
                                                        ***             ***
                                              (0.000)         (0.000)         (0.350)        (0.219)         (0.231)
Observations                                           1432            1422           1598            1562            1613
R-squared                                     0.671           0.690           0.628          0.252           0.429




                                                              33
Financial Systems, Efficiency and Stimulation of Sustainable Growth                                     Working Paper    FINESS.D.5.2




Table 9.

                                                 Entry                Exit            Net entry       Survival        Churning


Panel A
Initial industry share                           -0.009               0.089           -0.083          0.022           -0.014
                                                 (0.847)              (0.197)         (0.304)         (0.912)         (0.945)
Foreign*opacity(fixed assets)                    -0.008               0.008           -0.010          -0.026          -0.007
                                                           ***                  ***             ***             **
                                                 (0.000)              (0.000)         (0.000)         (0.013)         (0.144)
Start costs*natural                              0.001                0.005           0.004           -0.000          0.017
                                                 (0.811)              (0.493)         (0.708)         (0.993)         (0.388)
Constant                                         9.047                -0.974          2.582           90.917          3.575
                                                           ***                                                  ***
                                                 (0.000)              (0.474)         (0.148)         (0.000)         (0.338)
Observations                                     5037                 4660            4564            2586            1613
R-squared                                        0.094                0.078           0.113           0.242           0.146


Panel B
Initial industry share                           0.002                0.076           -0.063          0.086           -0.008
                                                 (0.967)              (0.273)         (0.435)         (0.658)         (0.969)
Foreign*opacity(skill dependence)                -0.341               0.373           -0.605          -0.635          -0.634
                                                 (0.004) ***          (0.007) ***     (0.000) ***     (0.285)         (0.035) **
Start costs*natural                              -0.000               0.005           0.003           0.001           0.019
                                                 (0.967)              (0.444)         (0.755)         (0.982)         (0.358)
Constant                                         11.219               0.605           4.634           52.555          14.924
                                                 (0.000) ***          (0.719)         (0.008) ***     (0.000) ***     (0.000) ***
Observations                                     5037                 4660            4564            2586            1613
R-squared                                        0.092                0.077           0.113           0.240           0.147


Panel C
Initial industry share                           -0.002               0.084           -0.075          0.084           -0.021
                                                 (0.967)              (0.225)         (0.350)         (0.666)         (0.922)
Foreign*opacity(share of small firms)            -0.001               0.001           -0.001          -0.001          -0.001
                                                           ***                  ***             ***
                                                 (0.000)              (0.001)         (0.000)         (0.213)         (0.026) **
Start costs*natural                              0.002                0.005           0.004           -0.000          0.023
                                                 (0.767)              (0.506)         (0.688)         (0.985)         (0.273)
Constant                                         15.549               1.138           7.619           33.704          10.038
                                                           ***                                  ***             ***
                                                 (0.000)              (0.539)         (0.001)         (0.000)         (0.032) **
Observations                                     4953                 4590            4496            2533            1588
R-squared                                        0.095                0.079           0.117           0.244           0.148




                                                                 34
Financial Systems, Efficiency and Stimulation of Sustainable Growth                       Working Paper   FINESS.D.5.2




Appendix A. List of industries

Code in Eurostat             Name
CA                           Mining and quarrying of energy producing materials
CB                           Mining and quarrying except energy producing materials
DA                           Manufacture of food products; beverages and tobacco
DB                           Manufacture of textiles and textile products
DC                           Manufacture of leather and leather products
DD                           Manufacture of wood and wood products
DE                           Manufacture of pulp, paper and paper products; publishing and printing
DF                           Manufacture of coke, refined petroleum products and nuclear fuel
DG                           Manufacture of chemicals, chemical products and man-made fibres
DH                           Manufacture of rubber and plastic products
DI                           Manufacture of other non-metallic mineral products
DJ                           Manufacture of basic metals and fabricated metal products
DK                           Manufacture of machinery and equipment n.e.c.
DL                           Manufacture of electrical and optical equipment
DM                           Manufacture of transport equipment
E40                          Electricity, gas, steam and hot water supply
E41                          Collection, purification and distribution of water
F45                          Construction
G50                          Sale, maintenance and repair of motor vehicles
G51                          Wholesale trade and commission trade, except of motor vehicles and motorcycles
G521                         Retail sale in non-specialized stores
G522                         Retail sale of food, beverages, tobacco in specialized stores
G523_TO_G525                 Non-food retail sale in specialized stores (52.3 to 52.5)
G526                         Retail sale not in stores
G527                         Repair of personal and household goods
H551_H552                    Hotels; camping sites, other provision of short-stay accommodation
H553_TO_H555                 Restaurants; bars; canteens and catering
I60                          Land transport; transport via pipelines
I61                          Water transport
I62                          Air transport
I641                         Post and courier activities
I642                         Telecommunications
K70                          Real estate activities
K7133                        Renting of office machinery and equipment including computers
K721                         Hardware consultancy
K722                         Software consultancy and supply
K723                         Data processing
K724                         Data base activities
K725                         Maintenance and repair of office, accounting and computing machinery
K726                         Other computer related activities
K73                          Research and development
K7411_TO_K7414               Legal activities; accounting, book-keeping and auditing activities; tax consultancy;
                             market research and public opinion polling; business and management consultancy
                             activities
K742                         Architectural and engineering activities and related technical consultancy
K743                         Technical testing and analysis
K744                         Advertising
K745                         Labour recruitment and provision of personnel
K746                         Investigation and security activities
K747                         Industrial cleaning
K748                         Miscellaneous business activities n.e.c.
O90                          Sewage and refuse disposal, sanitation and similar activities
O92                          Recreational, cultural and sporting activities
O93                          Other service activities




                                                             35

				
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