Meghana Ayyagari

Small vs. Young Firms Across the World: Contribution to Employment, Job Creation, and Growth

This paper investigates the contribution of small firms to employment, job creation, and growth in developing countries. While small firms (< 20 employees) have the smallest share of aggregate employment, the SME sectors (<100 employees) contribution is comparable to that of large firms. Small firms have the largest shares of job creation, and highest sales growth and employment growth, even after controlling for firm age. Large firms, however, have higher productivity growth. Conditional on size, young firms are the fastest growing and large mature firms have the largest employment shares but small young firms have higher job creation rates.

Firm Innovation in Emerging Markets: The Role of Finance, Governance, and Competition

We investigate the firm characteristics associated with innovation in over 19,000 firms across 47 developing economies. While existing finance literature on innovation is limited to large public firms in developed markets such as the United States, our database includes public and private firms, and small and medium-sized enterprises. We define innovation broadly to include introduction of new products and technologies, knowledge transfers, and new production processes. We find that access to external financing is associated with greater firm innovation. Further, having highly educated managers, ownership by families, individuals, or managers, and exposure to foreign competition is associated with greater firm innovation.

Firm innovation in emerging markets : the roles of governance and finance

The authors investigate the determinants of firm innovation in over 19,000 firms across 47 developing economies. They define the innovation process broadly, to include not only core innovation such as the introduction of new products and new technologies, but also other types of activities that promote knowledge transfers and adapt production processes. The authors find that more innovative firms are large exporting firms characterized by private ownership, highly educated managers with mid-level managerial experience, and access to external finance. In contrast, firms that do not innovate much are typically state-owned firms without foreign competitors. The identity of the controlling shareholder seems to be particularly important for core innovation, with those private firms whose controlling shareholder is a financial institution being the least innovative. While the use of external finance is associated with greater innovation by all private firms, it does not make state-owned firms more innovative. Financing from foreign banks is associated with higher levels of innovation compared with financing from domestic banks.

Does FDI Facilitate Domestic Entry? Evidence from the Czech Republic

This paper analyzes the impact of FDI on domestic firm entry and firm size distributions in the Czech Republic during 1994–2000. We find that larger foreign presence stimulates the entry of domestic firms within the same industry, indicating the existence of positive horizontal spillovers from FDI. We also find evidence of significant vertical entry spillovers—FDI in downstream (upstream) industries initiates entry in upstream (downstream) sectors. Our results also show that entry spillovers through vertical linkages are stronger than horizontal spillovers and that while service industries benefit from both horizontal and vertical spillovers, manufacturing industries do not experience significant positive entry spillovers of any kind. We also find that country of origin of FDI matters—horizontal spillovers are driven by FDI from the EU countries. The right skewness of the firm size distributions in industries without FDI further emphasizes an important role of FDI presence for overall industry dynamics.

What Determines Protection of Property Rights? An Analysis of Direct and Indirect Effects

Using cross-country data, the authors evaluate historical determinants of protection of property rights. They examine four historical theories that focus on conceptually distinct causal variables believed to shape institutions: legal origin, endowments, ethnic diversity, and religion. There is only one realization of the data with relatively few observations, which have by now been well explored in the literature. Given the correlations between the explanatory variables, it is difficult to fashion empirical tests which are consistent in their treatment of the competing theories and to know which regressions to take seriously, giving rise to competing interpretations in the literature. The authors use Directed Acyclic Graph (DAG) methodology to identify which historical factors are direct determinants of property rights protection and which are not, and subject the outcomes to a battery of robustness tests. The empirical results support ethnic fractionalization as a robust determinant of property rights protection. Despite the attention it has received in the literature, the impact of legal origin on protection of property rights appears fragile and dependent on the inclusion of transition economies in the sample.

Are Innovating Firms Victims or Perpetrators? Tax Evasion, Bribe Payments, and the Role of External Finance in Developing Countries

This paper investigates corruption and tax evasion and their firm-level determinants across 25,000 firms in 57 countries, a large fraction of which are small and medium enterprises in developing countries. Firms that pay more bribes also evade more taxes. Corruption acts as a tax on innovation, particularly that of small and young firms. Innovating firms pay a larger percentage of their revenues in bribes to government officials than non-innovating firms. They do not, however, pay more protection money to private parties than other firms. Comparing the magnitudes of bribes and taxes evaded, innovating firms and firms that use formal finance are more likely to be net victims. The findings point to the challenges facing innovators in developing countries and the role of banks in curbing corruption and tax evasion.

Bribe Payments and Innovation in Developing Countries: Are Innovating Firms Disproportionately Affected?

Innovating firms pay more bribes than noninnovators across 25,000 firms in 57 countries. The difference is larger in countries with more bureaucratic regulation and weaker governance. Innovators that pay bribes do not receive better services and do not have greater propensity to engage in other illegal activities such as tax evasion. Thus, innovators are more likely to be victims of corruption than perpetrators. Our findings point to the challenges facing entrepreneurs in developing countries and are consistent with the view that rent seeking by government officials unlike private criminal activity is more likely to target innovators.

Financing of Firms in Developing Countries: Lessons from Research

This paper reviews and synthesizes theoretical and empirical research on the role of finance in developing countries. First, the paper presents the stylized facts about firms in developing nations as well as the legal, financial and broader institutional framework in which these firms operate. Next, the paper focuses on the financing choices available to small and medium firms in developing countries and highlights areas needing additional research.

Does cross-listing lead to functional convergence? Empirical evidence

The author examines the effect of legal bonding on ownership and control structures of foreign firms cross-listing in the United States. Contrary to the predictions of corporate governance convergence theories, there is little evidence of convergence-related migration to a dispersed ownership structure on cross-listing. She finds that rather than as a means to change their governance structure, foreign firms use American Depository Receipts as a vehicle to sell control blocks, often to a new foreign owner. Firms that cross-list and sell stakes to domestic owners are from large economies with high stock market liquidity. In contrast, firm-level characteristics are more important predictors of a control change to a foreign owner. Cross-listing firms that sell control blocks to foreigners tend to be smaller, have low levels of debt, and have a high foreign income growth rate. The post cross-listing performance of firms that undergo a control change is also different from firms that do not experience a control change.

Size and age of establishments: evidence from developing countries

Survey data from 120 developing countries are used to examine the relation between establishment size and age in the formal sector. Existing research suggests that manufacturing establishments in developing countries do not grow over time, most likely because of market imperfections and regulations. To the contrary, this paper finds that the average plant in developing countries that is more than 40 years old employs almost five times as many workers as the average plant that is five years old or younger. The analysis finds consistent evidence when it looks within a large country, India, based on detailed manufacturing census data over 23 years. It also finds that differences in financial development across Indian states, while substantial, have a minor effect on firm growth, consistent with inefficiency of state-owned financial systems. These results hold controlling for differences in labor regulations across states, capital intensity, labor regulations, and firms born before and after the major reforms.