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Does business networking boost firms’ external financing opportunities? Evidence from Central and Eastern Europe

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  • Oluwarotimi Owolabi
  • Sarmistha Pal

Abstract

This article argues that networked firms are likely to have an advantage in securing bank finance in countries with weak legal and judicial institutions since it helps banks and other financial institutions to minimize the underlying agency costs of lending. An analysis of recent Business Environment and Enterprise Performance Survey (BEEPS) data from 15 Central and Eastern European (CEE) countries lends some support to this hypothesis. Even after controlling for other factors, firms affiliated to Business Associations (BA) are more likely to secure bank finance. Further, the importance of business networking is particularly evident among firms who borrow from private domestic banks, as these new banks attempt to minimize costs of adverse selection. There is also some confirmation that the significance of networking disappears with improvement in institutional quality.

Suggested Citation

  • Oluwarotimi Owolabi & Sarmistha Pal, 2013. "Does business networking boost firms’ external financing opportunities? Evidence from Central and Eastern Europe," Applied Financial Economics, Taylor & Francis Journals, vol. 23(5), pages 415-432, March.
    • Handle: RePEc:taf:apfiec:v:23:y:2013:i:5:p:415-432
    DOI: 10.1080/09603107.2012.725930
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    References listed on IDEAS

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    1. De Haas, Ralph & Ferreira, Daniel & Taci, Anita, 2007. "What determines banks’ customer choice? Evidence from transition countries," MPRA Paper 6319, University Library of Munich, Germany.
    2. Bacchetta, Marc & Drabek, Zdenek, 2002. "Effects of WTO accession on policy-making in sovereign states: Preliminary lessons from the recent experience of transition countries," WTO Staff Working Papers DERD-2002-02, World Trade Organization (WTO), Economic Research and Statistics Division.
    3. Minyan Zhu, 2012. "Large Foreign Banks and Small-Medium Sized Enterprises (SMEs): Friends or Foes," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2012-06, Centre for Competition Policy, University of East Anglia, Norwich, UK..
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    Cited by:

    1. Petra Maresova & Blanka Klimova & Vojtěch Tuček, 2015. "Use of social networks in banking: a study in the Czech Republic," Applied Economics, Taylor & Francis Journals, vol. 47(57), pages 6155-6169, December.
    2. Ma, Guangrong & Rui, Oliver Meng & Wu, Yiping, 2015. "A springboard into politics: Do Chinese entrepreneurs benefit from joining the government-controlled business associations?," China Economic Review, Elsevier, vol. 36(C), pages 166-183.

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