Local financial development and firm performance: Evidence from Morocco

a r t i c l e i n f o Combining data from the Moroccan census of manufacturing enterprises with information from a commune survey, we test whether firm expansion is affected by local financial development. Our findings are consistent with this hypothesis: local bank availability is robustly associated with faster growth for small and medium-size firms in sectors with growth opportunities, with a lower likelihood of firm exit and a higher likelihood of investment. Regarding the channel, the evidence suggests that, over the study period, access to credit was used by pre-existing Moroccan firms to mobilize investment funds, with some evidence that they were partly used towards reducing labor costs. There is now a large empirical literature, going back to King and Levine (1993), showing that a country's financial development matters for firm performance and aggregate growth. What has received less attention is within-country heterogeneity with respect to the availability of financing. Asymmetric information and transaction cost considerations suggest that physical distance between lender and borrower is likely to affect access to finance (e.g. Petersen and Rajan, 2002). Indeed borrowers' actions are harder to observe when lender and borrower are far apart, leading to adverse selection (of potential borrowers) and moral hazard (for current borrowers). These issues are of particular importance in less developed economies, increasing the probability that local financial development matters for firm performance. This paper tests whether local financial development matters for firm growth in Morocco. To this end we combine data on bank availability at the local level with manufacturing census data over the period 1998 to 2003 to study the effect of bank availability on firm growth, entry, and exit. We find that value added grows faster in fast growing sectors for small and medium-size firms located near a bank, providing evidence for the importance of local financial development for small firm development. There are only few papers that study the importance of within-country variation in financial development. Jayaratne and Strahan (1996) use cross-state variation in bank regulation within the US to study the link between financial development and growth, mainly over the 1970s and 1980s. Dehejia and Lleras-Muney (2007) exploit state-level variation in banking regulation in the US to study regulation , financial development, and growth over the period 1900–1940. Guiso et al. (2004) investigate the role of financial development in Italy, exploiting variation across regions. These papers generally confirm the role …