THE ROLE OF LONG-TERM FINANCE - THEORY AND EVIDENCE

Improving the supply of long-term credit to industrial firms is consid ered a priority for growth in developing countries. A World Bank multi country study looks at whether a long-term credit shortage exists and if so, whether it has had an impact on investment productivity, and gr owth. The study finds that even after controlling for the characterist ics of individual firms, businesses in developing countries use signif icantly less long-term debt than their counterparts in industrial coun tries. Researchers are able to explain the difference in debt composit ion between industrial and developing countries by firm characteristic s; by macroeconomic factors; and most importantly, by financial develo pment, government subsidies, and legal and institutional factors. The analysis concludes that long-term finance tends to be associated with higher productivity. An active stock market and an ability to enter in to long-term contracts also allow firms to grow at faster rates than t hey could attain by relying on internal sources of finds and short-ter m credit alone. Importantly, although government-subsidized credit mar kets have increased the long-term indebtedness of firms, there is no e vidence that these subsidies are associated with the ability of firms to grow faster Indeed in some cases subsidies are associated with lowe r productivity.