1. Comments on: Firm Growth and Finance: Are Some Financial Institutions Better Suited to Early Stages of Development than Others? by Robert Cull and L. Colin Xu World Bank Stijn Claessens World Bank Conference on Financial Structure and Economic Development June 16, 2011, Washington, D.C.

2. Question and Answer Does a financial sector better matched in structure to country’s optimal (based on endowment, development) industrial structure deliver more (labor) growth? Does a financial sector better matched in structure to country’s optimal (based on endowment, development) industrial structure deliver more (labor) growth? Yes: some evidence that more bank-oriented systems help labor growth in countries at lower development Yes: some evidence that more bank-oriented systems help labor growth in countries at lower development Labor growth higher when banks more important Labor growth higher when banks more important Stock markets help more for rich countries Stock markets help more for rich countries But: not because small firms grow faster But: not because small firms grow faster Rather, labor at large, capital intensive firms grows faster Rather, labor at large, capital intensive firms grows faster Contradicts the financial structure channel Contradicts the financial structure channel

3. Praise/Main Comments Surely a worthwhile topic Surely a worthwhile topic Need to go beyond private credit to GDP Need to go beyond private credit to GDP Financial crisis has raised (new) questions on finance Financial crisis has raised (new) questions on financeComments Like to see more clearly defined what the optimal economic/industrial and financial structures are Like to see more clearly defined what the optimal economic/industrial and financial structures are What is H0? And how does this translate into tests? What is H0? And how does this translate into tests? Would like to see other RHS and LHS variables Would like to see other RHS and LHS variables LHS: Not just labor growth LHS: Not just labor growth RHS: More on financial structures and controls RHS: More on financial structures and controls Of course, questions on endogeneity/instruments Of course, questions on endogeneity/instruments

4. What is optimal? Paper does not claim to test why there are “deviations” from “optimal” financial structure Paper does not claim to test why there are “deviations” from “optimal” financial structure But has specific optimal structure view But has specific optimal structure view Banks do better job at lower levels of development Banks do better job at lower levels of development And makes industrial structure = development And makes industrial structure = development Story about financial structure can go other ways Story about financial structure can go other ways Large commercial banks in Germany during industrial revolution mobilized financing → growth Large commercial banks in Germany during industrial revolution mobilized financing → growth (State) banks in Japan similar coordinated economy (State) banks in Japan similar coordinated economy

5. What is optimal industrial structure? What is optimal financial structure? Industrial = level of development (GDP/Capita)? Industrial = level of development (GDP/Capita)? But story more about the structure of economy. Implies at similar levels of development can have large differences in what is optimal But story more about the structure of economy. Implies at similar levels of development can have large differences in what is optimal Suggests to introduce some proxies like agriculture, services, industry, natural resources, land-locked, etc. to be used for some interactions Suggests to introduce some proxies like agriculture, services, industry, natural resources, land-locked, etc. to be used for some interactions Financial structure Financial structure Can one be more precise in terms of what are the market failures? And then decide test? Can one be more precise in terms of what are the market failures? And then decide test?

6. Comments on Dependent Variable Dependent variable not so obvious Dependent variable not so obvious Why labor growth? If development is labor-intensive, why does financing and financial structure matter (so much)? Also, is this most reliable indicator? Why labor growth? If development is labor-intensive, why does financing and financial structure matter (so much)? Also, is this most reliable indicator? Short sample over which labor growth is measured Short sample over which labor growth is measured Look at labor growth in specific sectors? Look at labor growth in specific sectors? Other variables that are candidates? Other variables that are candidates? # of firms, growth of some specific sectors that are know to vary in financial structure demands (“RZ”) # of firms, growth of some specific sectors that are know to vary in financial structure demands (“RZ”) Sales, productivity, profitability, etc. Sales, productivity, profitability, etc.

7. Comments on Independent Variables Independent variables not so obvious either Independent variables not so obvious either Now size of banks and capital markets Now size of banks and capital markets Why not (include): Why not (include): Size of banks, concentration: more related to H0? Size of banks, concentration: more related to H0? Besides ownership structures, foreign vs. domestic banks, and state/private: also type of banks? Besides ownership structures, foreign vs. domestic banks, and state/private: also type of banks? Number of branches/access indicators Number of branches/access indicators Activity restrictions? BCL? Activity restrictions? BCL? Presumably: legal/property rights as control variables? Presumably: legal/property rights as control variables?

8. Other Comments on RHS/LHS Does one want so much firm controls, like age? Does one want so much firm controls, like age? Some are LHS possibly (size? age? foreign ownership) Some are LHS possibly (size? age? foreign ownership) Can one use more actual financing of firms? Can one use more actual financing of firms? Surveys indicate role of external financing Surveys indicate role of external financing Look at sample more constrained? Look at sample more constrained? Financial development Financial development If stock market is not developed, still include “0” If stock market is not developed, still include “0” How about other non-bank finance: insurance, leasing? How about other non-bank finance: insurance, leasing? Does international financial integration matter? Does international financial integration matter?

9. Methodology Does instrumental variables (GMM, LIML) Does instrumental variables (GMM, LIML) Find robust results with some instruments Find robust results with some instruments Logical instruments? Many stories Logical instruments? Many stories Oil needs external financing? Trust is endogenous? Oil needs external financing? Trust is endogenous? Also, expect crops growth is endogenous Also, expect crops growth is endogenous Do not do a formal horse race of 3 H0s Do not do a formal horse race of 3 H0s Do not check whether political economy matters Do not check whether political economy matters

10. Other Comments Legal variables could be LHS too, e.g., more relationship lending, more credit information Legal variables could be LHS too, e.g., more relationship lending, more credit information Are there substitutes out there? Are there substitutes out there? Do business groups correct for the lack of optimal structure? Do business groups correct for the lack of optimal structure? Informal forms of financing? Informal forms of financing? Interpretation: provide economic magnitudes Interpretation: provide economic magnitudes Effects at country levels of financial structure Effects at country levels of financial structure

11. Paper shows that: Paper shows that: Financial structures matter for labor growth Financial structures matter for labor growth But not as expected for specific types of firms But not as expected for specific types of firms But paper does not yet But paper does not yet Address H0 directly: why does structure matter? Address H0 directly: why does structure matter? Can not conclude certain structure preferred Can not conclude certain structure preferred Suggestions Suggestions More analytical modeling on financial structure More analytical modeling on financial structure More empirical work, some is feasible with this data More empirical work, some is feasible with this data Look more at industrial structure explicitly Look more at industrial structure explicitly Summary