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SMEs and financial dependence: how important are foreign banks?

Saibal Ghosh (Qatar Central Bank, Doha, Qatar)

Indian Growth and Development Review

ISSN: 1753-8254

Article publication date: 18 April 2024

Issue publication date: 6 November 2024

42

Abstract

Purpose

The importance of financial dependence of small and medium enterprises (SMEs) on their performance is a relatively unaddressed area of research. Relatedly, whether and to what extent foreign bank penetration exerts an impact in the presence of financial dependence also remains an open question. The purpose of the paper in this regard is to exploit unit-level data on Indian SMEs and assess the independent and interactive effects of financial dependence on SME behaviour, in the presence of foreign banks.

Design/methodology/approach

This study uses fixed effects specification to address the issue. In subsequent analysis, this study also uses an instrumental variable approach for robustness.

Findings

The results indicate that financial dependence improves investment and employment, although there is a decline in productivity. These findings differ across size classes of SMEs. Similar is the evidence in the presence of foreign banks. In particular, foreign bank penetration leads to a decline in investment for micro and medium SMEs, although for small SMEs, the impact is found to be the opposite.

Originality/value

To the best of the author’s knowledge, this is one of the early within-country studies to examine the interface between SMEs and financial dependence and the role played by foreign banks in this regard.

Keywords

Acknowledgements

The author would like to thank without implicating, two anonymous reviewers for the extremely pertinent comments on earlier drafts, which helped to sharpen the exposition. The author would also like to thank the Editor, Professor Chetan Ghate for raising several useful comments. Needless to say, the views expressed and the approach pursued in the paper are the personal opinions of the author.

No funding is reported by the author.

Disclosure: No potential conflict of interest was reported by the author.

Citation

Ghosh, S. (2024), "SMEs and financial dependence: how important are foreign banks?", Indian Growth and Development Review, Vol. 17 No. 3, pp. 361-377. https://doi.org/10.1108/IGDR-03-2023-0026

Publisher

:

Emerald Publishing Limited

Copyright © 2024, Emerald Publishing Limited

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