TRANSITION REPORT 2014 Innovation in Transition

Conclusion

The process of firms’ adoption of technology is neither inevitable nor automatic.16 Firms can remain stuck in a pattern of low productivity and weak growth for a long time, even after other businesses in the country have managed to upgrade their operations and move closer to the international technological frontier. Chapter 3 of this Transition Report outlined the main country-level barriers that are currently preventing firms across the EBRD region from benefiting from the world’s technological advances.

This chapter has focused on one key determinant of technological progress at firm level: the ability of entrepreneurs to successfully tap into external funding sources. This analysis shows that while access to bank credit does not matter much for firms’ capacity to conduct in-house R&D – for which access to private or public equity may be necessary (see Box 4.1) – it does determine the pace at which firms can upgrade their production processes, as well as the products and services they offer.

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Thus, improving access to bank credit may allow firms in emerging markets to more effectively exploit the global pool of available technologies, increasing the productivity of these firms and helping these countries to catch up with more advanced economies.

Against this background, it is worrying that roughly a quarter of all firms that were interviewed for the BEEPS V survey
indicated that they needed bank credit but were unable to access it. These firms either decided not to apply for a loan for fear of rejection or were refused one when they actually approached a bank.

Of course, not all the businesses will have been creditworthy, and banks may have been right not to lend to them. However, the findings presented in this chapter also indicate that factors external to firms (and thus external to their creditworthiness) are equally important for access to credit. In particular, the probability of a firm managing to access bank credit continues to be strongly influenced by the number and type of banks that happen to be in its immediate vicinity.

This raises the question of what policy-makers in the EBRD region can do to improve access to credit for small businesses. This question has become even more acute in the wake of the global financial crisis, which has had a particularly strong impact on smaller firms,17 thus potentially delaying the economic recovery in many parts of the world.

Moreover, this chapter shows that, in addition to negative cyclical effects, the inability of firms to access bank credit may also have longer-term implications for growth, as credit-constrained firms will find it difficult to upgrade their products and production processes.

While short-term policy responses, such as special funding schemes for small firms, may have a role to play in alleviating such firms’ funding constraints, they are unlikely to solve all problems in the long run. Instead, some banks – at least, those that target smaller businesses – may also need to adjust their lending models at the margins.

Recent research suggests that banks which engage in relationship lending – whereby banks develop long-term lending relationships with small and medium-sized firms, accumulating inside information about these companies – may be better able to lend to relatively opaque borrowers.18 This is particularly true during cyclical downturns, when loan officers tend to be less able to rely on collateral and hard information and need, instead, to conduct an in-depth assessment of a firm’s prospects. This requires more subtle judgements and better information about the abilities and determination of firms’ owners and management. Relationship lenders tend to be better equipped to arrive at such judgements during an economic downturn.

Banks may also need to refine their business models in other ways. For example, financial innovation may contribute to gradual improvements in small firms’ access to financing (see Box 4.2). Lastly, policy-makers can also help banks lend to smaller businesses by establishing credit bureaus and registries, which facilitate the sharing of borrower information among lenders.