Evaluation of Credit Guarantee Policy using Propensity Score Matching

In the aftermath of the Asian financial crisis in Korea, the credit guarantee policy was used as an instrument by the government to support small and medium enterprises (SMEs). However, the effect of the credit guarantee has not been carefully studied and the policy has been criticized for impairing development of innovative private financial sector and for making SMEs highly dependent on government policy. In this paper, we evaluate the effect of the credit guarantee policy by comparing a large sample of guaranteed firms and matched non-guaranteed firms from 2000 to 2003. The sample firms are compared with respect to growth rates of different performance indicators including: productivity, sales, employment, investment, R&D, wage level and survival of firms in the post crisis period. To avoid the selectivity problem, recently developed propensity score matching methodologies are adopted. Results suggest that the guarantee provision influenced significantly for supported firms to maintain their size in terms of sales and employment, and increase their survival rate, but credit guarantees did not help firms to increase their R&D and investment and hence, growth in productivity. Moreover, the selection of firms to receive guarantee funds was not linked to the productivity of the supported firms.