What is the Impact of Access to Finance for Firms?
When a firm has access to external finance, it is likely to grow faster. In India, for example, small- and medium-sized firms have expanded after becoming eligible to borrow from a bank at subsidized interest rates. Moreover, by having access to finance, small firms can allocate assets more efficiently, and can increase innovation. By contrast, when small firms face difficulties in obtaining external finance, they lose opportunities to grow and innovate. Foreign banks entry into developing countries tends to improve access to finance for firms. Although most large foreign banks focus on lending to larger firms rather than small- and medium-sized enterprises (SMEs), often this forces local banks, facing increased competition for large firm business, to look for profitable services in segments that they had previously ignored−like SMEs. Also, when the market share of foreign banks is higher, there are fewer firms that face obstacles to external finance. VI. Government Policies to Improve
