Financial constraints and institutional quality: Which is the effect to be on the “wrong side” of the institutional border

Greta Falavigna (Research Institute on Sustainable Economic Growth of the National Council of Research (CNR-IRCrES))
Roberto Ippoliti (Università del Piemonte Orientale)

Abstract

Considering a population of manufacturing SMEs located in a common socio-cultural environment and divided by an institutional border, this work investigates the potential consequences of being sited on the “wrong” side of that border (i.e., the area with a longer delay in enforcing credit rights). According to our results, we cannot reject the hypothesis that locations affect the financing of SMEs, providing a contribution to the current debate on whether institutions are a source of comparative advantage (or disadvantage) in regional growth. Indeed, crossing that institutional border and assuming we detect a 10% higher inefficiency, we expect to observe a lower financial debt ratio (-0.03) and a lower trade credit ratio (-0.06), as well as a higher shareholders’ loan ratio (+0.08) and lower investments in tangible fixed assets (-2,733 TEUR). Policy implications concern the opportunity for a structural reform of the national institutional system, as well as the adoption of specific policies to support the SMEs located on the “wrong” side of the border, supporting their access to the capital market.

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