Credit supply and productivity growth

Summary

Focus

We look at how and why changes in bank credit supply affect firm productivity. In particular, we study whether supply driven contractions in bank credit, such as those incurred by firms during the Great Recession (GR), impairs their ability to earn revenues for a given amount of accumulated inputs (by affecting their productivity enhancing activities).

Contribution

Several research papers have shown that credit supply helps firms purchase inputs, most notably capital, thus allowing them to increase production. This paper extends this research by showing that credit affects firm productivity beyond the estimated scale effect.

We do so by exploiting a matched firm-bank database for a large sample of Italian firms over the period 1997-2013. This allows us to identify idiosyncratic supply-side shocks to firm credit availability. We exploit detailed balance sheet data and information from several surveys to identify firms' productivity and trace it back to a large set of firm-level activities. We also focus on the GR, exploiting the shock to credit supply induced by the freeze of the interbank market in 2007-08.

Findings

We find that credit contractions have a negative and persistent effect on firm productivity. The credit contraction observed during the GR could account for about a quarter of the observed decline in Italian productivity. Positive credit supply shocks have a much more limited positive impact, implying that credit volatility may be bad for productivity growth. The estimated impact is found to result from several productivity enhancing activities. These include R&D, patenting, adoption of IT, improved management practices and propensity to export.

Abstract

We study the impact of bank credit supply on firm output and productivity. By exploiting a matched firm-bank database which covers all the credit relationships of Italian corporations over more than a decade, we measure idiosyncratic supply-side shocks to firms' credit availability. We use our data to estimate a production model augmented with financial frictions and show that an expansion in credit supply leads firms to increase both their inputs and their output (value added and revenues) for a given level of inputs. Our estimates imply that a credit crunch will be followed by a productivity slowdown, as experienced by most OECD countries after the Great Recession. Quantitatively, the credit contraction between 2007 and 2009 could account for about a quarter of the observed decline in Italy's total factor productivity growth. The results are robust to an alternative measurement of credit supply shocks that uses the 2007-08 interbank market freeze as a natural experiment to control for assortative matching between borrowers and lenders. Finally, we investigate possible channels: access to credit fosters IT-adoption, innovation, exporting, and the adoption of superior management practices.

JEL classification: D22, D24, G21

Keywords: credit supply, productivity, export, management, IT adoption