Financial Constraints and Industrial Districts: Does Internal Finance Matter?

This paper investigates the relationship between finance and capital investment for a panel of more than 1.000 Italian manufacturing firms. We estimate the sensitivity of capital investment to cash flow, testing for the presence (absence) of informational frictions in the credit market for companies located in industrial districts. The underlying hypothesis is that the sensitivity of investment to cash flow, which is interpreted as a measure of financial constraints, is assumed to be higher for firms that show a higher wedge between the internal and external cost of finance. The costs of generating borrower-specific information are, in fact, increasing with territorial distance and the co-location of banks and firms in the same area facilitates the exchange of relevant information upon which relationships of mutual trust can be built. This is the case of Italian industrial districts in which socio-economic interactions, both at the firm and credit market level, are favoured by spatial concentration. We use a GMM method that controls for unobserved firm-specific effects and endogenous explanatory variables. Cash flow plays an important role in explaining capital investment, especially for firms which are not located in a district. The results confirm that the reduced geographical distance with credit suppliers in district areas can lead to overcoming information asymmetries between lenders and borrowers.