The Role of Financial Structure and Financial Depth in Economic Growth: A Firm Level Analysis for Turkey By Olcay Yücel ÇULHA Pınar ÖZBAY ÖZLÜ Cihan YALÇIN INTERNATIONAL CONFERENCE ON SUSTAINABLE GROWTH STRATEGIES FOR TURKEY Swissotel, İstanbul FRIDAY, 17 JUNE 2005

Extensive literature on the relationship between financial system and growth starting from Schumpeter Cross country panel data analyses confirm that well developed financial system supports economic growth. Small, high tech firms contribute to employment, innovations and growth significantly as long as financial constraints that they face are relieved. LITERATURE

Finance sources, share in total balance sheets FINANCIAL STRUCTURE IN TURKEY: STYLIZED FACTS Bank Credit Bond Shareholder Equity Trade Credit (*) G-7 Countries Emerging Countries Turkey (*):For Turkey it is defined as the sum of trade credits and credits from partners, participations and the others (based on 4 thousand manufacturing firms)

The finance choice of firms classified according to different firm groups for period are given in details in Figures (based on 2 thousand manufacturing firms that report regularly). FINANCIAL STRUCTURE IN TURKEY: STYLIZED FACTS

Turkey has witnessed a long-lived macroeconomic instability which also distract the mechanisms that allocate resources from savers to investors. The unavailability and high cost of financial sources turned out to be obstacles that potentially restrain sustainable economic growth and employment. By this study, we try to uncover the implications of the firms ’ finance choice for various firm groups, namely small, large, young, old, high-tech etc. We want to answer the following question: Does the current financial system support small and medium sized, young, high tech firms that are main contributors of employment, innovation and thus economic growth? MOTIVATION

This study uses the data set of balance sheets, income statement and other information belonging to firms which report information regularly to the Central Bank of Turkey. Around 4 Manufacturing thousand firms DATA

GSALE it = f(LEMP it, EXPSHA it, PROFITA it, LTALAB it, GSALE it = f(LEMP it, EXPSHA it, PROFITA it, LTALAB it, EXTFIN it, EXTFIN it *DUM j, MBLOAN t, EXTFIN it, EXTFIN it *DUM j, MBLOAN t, MBLOAN t *DUM j, GDP t, YDUM) MBLOAN t *DUM j, GDP t, YDUM) MODEL

DESCRIPTION OF VARIABLES GSALE it Change in the logarithm of real sales (growth of firm sales) LEMP it,The logarithm of firm employment to control for the firm size. EXPSHA it,The share of exports in total sales (%) to consider the openness of the firms. PROFITA it The ratio of retained earnings in total assets (%) to control for profitability LTALAB it The logarithm of the ratio of the real tangible assets to number of employees. BLOSH it The share of bank loans in total private credits of the banking system (%) RTBLO it The share of bank loans in total balance sheets of firms (%) RTCRED it The share of short-term trade credits in balance sheet (%) ROSTD it The share of short-term other debt in balance sheet (%) MBLOAN t Indicator for financial debt and is the ratio of private credit extended by banks to gross domestic product (%). GDP t Growth rate of Gross Domestic Product (%) YDUMTime dummies

All FirmsSmallMediumLarge MBLOAN0,005**0,010***0,0030,002 (2,36)(4,36)(1,42)(0,89) MBLOAN*DUM -0,013***0,0040,014*** (5,36)(1,51)(4,62) BLOSH0,142***0,150***0,151***0,043 (5,26)(5,52)(5,32)(0,57) BLOSH*DUM -0,132-0,0970,121 (0,73)(1,11)(1,50)

YoungHi-techQuotedCrisis MBLOAN0,0030,008***0,005** (1,38)(3,83)(2,36)(2,54) MBLOAN*DUM0,003-0,015***0,001-0,002** (1,46)(5,31)(0,28)(2,33) BLOSH0,083**0,184***0,160***0,127*** (2,46)(6,50)(5,55)(4,64) BLOSH*DUM0,163***-0,434***-0,130*0,147*** (2,94)(4,80)(1,79)(3,09)

All firmsSmallMediumLarge MBLOAN *** (1.35)(3.53)(0.42)(0.05) MBLOAN*DUM ***0.004*0.013*** (5.63)(1.72)(4.68) RTCRED0.005*** 0.004***0.005*** (16.08)(13.04)(11.16)(15.39) RTCRED*DUM **0.002*** (2.53)(3.12)(0.56) CONSTANT-0.758*** ***-0.753*** (10.91)(10.92)(10.94)(10.84)

YoungHi-techQuotedCrisis MBLOAN ***0.003 (0.67)(2.69)(1.35)(1.57) MBLOAN*DUM *** *** (1.08)(4.53)(0.06)(2.78) RTCRED0.004*** 0.005*** (9.36)(13.13)(16.02)(15.02) RTCRED*DUM0.001**0.002*** ** (2.46)(3.08)(0.12)(2.42)

We believe that long-lived macroeconomic instability and high public borrowing requirement distracted the functioning of financial sector and prevent the development of well functioning financial institutions. Non-financial firms, mainly large ones, behaved as intermediaries, which led to inefficiencies in the economy. Inefficiencies in the banking sector and other institutional weaknesses caused the short term trade credits to appear as a widely used financing source for firms that are in need of external finance. This structure is far from supporting long-term investment and thus sustainable growth as specialization is discouraged and non-market relations along with informal financial activities are encouraged. Empirical results show that small, high-tech firms that are main sources of the employment and innovation, are not well-supported by this system. We believe that this financial structure is one of the main obstacles for creating new jobs and thus achieving sustainable economic growth. CONCLUSIONS

As evident in many developed countries, diversification in the finance choices in the forms of issuing bonds and equity and especially venture capital is believed to improve the institutional quality of the financial system. This implies less informality, cheaper resources, competition, more resources for weakly capitalized firms and innovative investment. In this context, improvement of the corporate governance is the key issue in the sense that it may provide right signals to savers and financial intermediaries. Reliable reporting and availability of proper ratings are believed to support institutionalization of small and medium sized firms. CONCLUSIONS