Financial Dependence, Macroeconomic Stability, and Firm Growth: What Policy Implications for Indonesia?

This paper investigates the impact of firms’ financial dependence and macroeconomic stability on the firms’ growth and examines the determinants of the firms’ growth. The approach of this paper is an empirical study using firm-level data of listed non-financial firms in each of the Asian crisis affected countries’ stock exchanges, including Indonesia, Malaysia, Thailand, Philippines, and South Korea for the year 2002-2007. The first step is analyzing the determinants and general pattern of the firms’ growth in Indonesia and detecting the impact of the firm’s financial dependence on the firms’ growth in Indonesia. The analysis is extended by exploiting the firm-level data of the aforementioned five countries to probe the impact of macroeconomic stability on firm growth. This paper finds that in Indonesia, firms’ dependence on external-financing has a negative association with the growth of the firms. This paper also shows that high inflation depresses externally-dependent firms more severely. High exchange rate volatility is also found to have an adverse impact on the growth of the firms. In addition, a more active stock market is found to have a positive impact on the firms’ growth as a medium for the firms’ future growth expectations. In general, the general determinants of the growth of the firms, specific for Indonesia, are the initial relative size of the firms, profitability, the firms’ future growth expectations (the firms’ growth opportunity), and capital expenditures. This paper argues for the importance of the presence of structural policies in the financial sector which can ease the flow of external financing to firms, so that externally dependent firms can achieve solid growth. On the macroeconomic side, exchange rate stability both for the prices of goods and services (inflation) and on the other countries’ exchange rate should be achieved because it is supportive of the growth of the firms. A mo re active stock market is also necessary since it also supports the firms’ growth. Consequently, a policy-mix of (i) financial sector policies which assure the smoothness of external financing to firms and (ii) macroeconomic policies which focus on maintaining macroeconomic stability will support the growth of the firms at the micro-level.