Financial constraints and productivity growth: firm-level evidence from a large emerging economy

Financial constraints and productivity growth: firm-level evidence from a large emerging economy

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Yusuf Kenan Bağır, Ünal Seven

English

November 2021

We study whether the linkage between financing and productivity growth strengthens as the severity of financial constraints increases by using firm-level administrative data from a large emerging economy. We also explore whether upstream firms’ financial constraints play a role in the linkage between finance and productivity. Using a combination of administrative databases of tax registry and firm-to-firm trade data of 896,317 Turkish firms from 2007 to 2018, employing various robustness tests and controlling for reverse causality, we find strong evidence that firms facing higher financial constraints exhibit a higher sensitivity of total factor productivity (TFP) growth to debt growth. Moreover, we show that a rise in upstream firms’ financial constraint level also leads to increased sensitivity of TFP growth to debt growth. Our results reveal important channels through which financial constraints could hinder productivity growth in Turkey.

TFP growth, Financial constraints, Debt growth

D24; G30; O16