‘A 10 percent increase in the share of investments financed through bank loans (equivalent to doubling the average share) is associated with a 3 percent increase in employment growth. This result is robust to alternative measures of finance, including formal bank financing of investment to trade credit among firms.’<sup>81</sup> By contrast, Commander and Svejnar (2007) cannot find a significant effect of their subjective ‘cost of finance’ variable on firm revenue in their dataset from Eastern Europe and Central Asia.<sup>82</sup> Dollar et al. (2005) find no significant effect of their financial indicator ‘access to overdraft facility’ on productivity of firms in the garment industry, but in an expanded sample they do find a significant and strongly positive impact of the variable on annual sales growth. Dollar et al. (2006) find a relatively robust positive relationship between ‘access to overdraft’ and the probability that a firm is an exporter.<sup>83</sup> Hallward-Driemeir, Wallsten and Xu’s (2006) study of the Chinese business climate yields no significant link between a variety of firm performance indicators and bank access. As pointed out above, this result may largely be due to the peculiar nature of the Chinese state owned banking sector which tends to be relatively inefficient and subsidizes unsuccessful enterprises for political reasons. Thus, it is not particularly surprising that access to finance has no systematic impact on variations in firm performance in China.<sup>84</sup> Escribano and Guasch (2005) do not include a variable indicating availability of credit to the firm in their equations. However, they do include one dummy indicating whether the firm is a publicly listed company, and another dummy that represents whether the firm is externally audited or not. Both indicators are significantly positively related to firm productivity (between 11.5 and 17 percent).

In a large cross country sample, Carlin et al. (2006) find the coefficient of their subjective indicator of ‘cost of finance’ to be negative in both between and within-country regressions, and also significant in the latter. However, they argue that this result is not primarily due to financial constraints impacting productivity, but rather the fact that inherently less productive firms are rationally denied credit by financial managers (and complain about it). This reasoning makes intuitive sense, but Carlin et al.’s actual results are undermined by weaknesses in their methodology. For instance, if the above endogeneity bias is suspected as a problem, the authors should also have tested the relationship between firm productivity and the average cost of finance in the firms’ location and industry (rather than for the firm itself), thus alleviating the firm-level endogeneity. Moreover, the endogeneity mechanism they highlight seems more likely to impact subjective data and seems less relevant for objective data on which much of the significant relationships found in the literature are based. Finally, their method of regression on one indicator at a time is also sub-optimal because it is likely to cause omitted variable bias. While the finance-endogeneity effect they highlight is interesting and should be kept in mind when interpreting results of financial indicators, their

> 81 Aterido, R., M. Hallward-Driemeier and C. Pagés. 2007: 8.

> 82 Except when the variable is entered separately from the other IC variables, which renders it vulnerable to omitted variable bias

> 83 Dollar, D., M. Hallward-Driemeier and T. Mengistae. 2005. 1507.

> 84 Hallward-Driemeier, M., S. Wallsten and L.C. Xu. 2006: 645.

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