1. Comment on “A More Complete Conceptual Framework for SME Finance,” by Berger and Udell Zoltan J. Acs Ph.D University of Baltimore and Max Planck Institute Conference on Small and Medium Enterprises October 14-15, 2004 World Bank, MC 13-121

2. Growth Theory Solow Model (1956) Solow Model (1956) –Economies of scale »Growth comes from new (bigger) plants Romer Model (1990) Romer Model (1990) –Externalities (knowledge spillovers) »Growth Comes from new (growing) firms

5. Regional Employment Growth Entrepreneurial Activity(+) Entrepreneurial Activity(+) –New firms(+) –Small firms(+) Agglomeration Effects(+) Agglomeration Effects(+) –Density(+) –Specialization(+) Human Capital(+) Human Capital(+) –High school(+) –College(+)

6. Explaining Regional Employment Growth 1990-1993; 1993-1996; 1996-1999 Entrepreneurial Activity(+) Entrepreneurial Activity(+) –New firms(+ + +) –Small firms(+ 0 0) Agglomeration Effects(+) Agglomeration Effects(+) –Density(- - 0) –Specialization(- - -) Human Capital(+) Human Capital(+) –High school(+ + +) –College(0 0 +)

7. The 21 st Century In the Solow (1956) world public policy for growth was build a bigger plant to take advantage of scale economies. In the Solow (1956) world public policy for growth was build a bigger plant to take advantage of scale economies. –Lower interest rates; Anti-Trust In the Romer (1990) world public policy for growth is to have more young firms to take advantage of knowledge spillovers. In the Romer (1990) world public policy for growth is to have more young firms to take advantage of knowledge spillovers. –Enabling policies for new firms »Debt »Equity

8. The Size of the SME Sector According to the Global Entrepreneurship Monitor (GEM) about 286 million individuals, or 12 percent of 2.4 billion adults 18-64 years of age in the 37 GEM countries, were either actively engaged in the start-up process or managing a business less than 42 months old in the Spring of 2002. According to the Global Entrepreneurship Monitor (GEM) about 286 million individuals, or 12 percent of 2.4 billion adults 18-64 years of age in the 37 GEM countries, were either actively engaged in the start-up process or managing a business less than 42 months old in the Spring of 2002.

9. GEM and Finance The main concern in GEM is about equity finance with almost no mention of debt finance. The main concern in GEM is about equity finance with almost no mention of debt finance. –View debt as less glamorous then equity –Debt is 50 percent of capital structure –This is true in even the youngest firms –This is true even for firms going public

10. Sources of Financing for all Small Firms Equity Equity –Owner 31.33% –Angel3.59% –Venture Capital 1.85% Debt Debt –Comm. Banks 18.75 % –Trade Credit 15.8% –Finance Companies 4.9%

11. Berger and Udell This is an interesting paper. The purpose of this paper is to present a more complete picture of SME lending. This is an interesting paper. The purpose of this paper is to present a more complete picture of SME lending. –Much of the research on SME lending recently has focused on the comparative advantages of »Transactions lending technologies Hard Data Hard Data Favor large banks Favor large banks »Relationship lending Soft Data Soft Data Favor smaller banks Favor smaller banks

12. Berger and Udell Others focus on foreign vs domestic banks Others focus on foreign vs domestic banks An additional area of concern regarding SME credit availability is the lending infrastructure of a nation, which defines the rights and flexibility of financial institutions to fund SMEs. An additional area of concern regarding SME credit availability is the lending infrastructure of a nation, which defines the rights and flexibility of financial institutions to fund SMEs. –Bankruptcy laws –Regulation of financial institutions –Accounting Standards

13. Berger and Udell They show how a nation’s lending infrastructure directly affects the extent to which each of the individual lending technologies for SMEs are employed. They show how a nation’s lending infrastructure directly affects the extent to which each of the individual lending technologies for SMEs are employed. The main point here, and I think this is a major step forward is that shortcomings in the lending infrastructure may restrict SME credit availability in a variety of ways. The main point here, and I think this is a major step forward is that shortcomings in the lending infrastructure may restrict SME credit availability in a variety of ways.

14. Berger and Udell They view this conceptual framework as part of the evolving research literature on the finance- growth nexus. This literature has generally found that countries with better financial systems tend to have superior economic growth. They view this conceptual framework as part of the evolving research literature on the finance- growth nexus. This literature has generally found that countries with better financial systems tend to have superior economic growth. However, this research has not come to consensus regarding exactly which dimensions of the financial system matter most. However, this research has not come to consensus regarding exactly which dimensions of the financial system matter most.

15. Berger and Udell Lending Technologies and the Supply of SME credit Lending Technologies and the Supply of SME credit –Need large database on loan performance –They need either a strong information environment or large institutions or both. Do new firms perform better with Do new firms perform better with –Transaction lending or Relationship lending? Does this favor large banks and foreign banks for developing countries? Does this favor large banks and foreign banks for developing countries?