Academic journal article Journal of Business Economics and Management

Overdraft Facility Policy and Firm's Performance: An Empirical Analysis in Eastern European Union Industrial Firms

Academic journal article Journal of Business Economics and Management

Overdraft Facility Policy and Firm's Performance: An Empirical Analysis in Eastern European Union Industrial Firms

Article excerpt

1. Introduction

The overdraft facility (1) policy from private financial institutions provides financial support to increase firms' accessibility to private financing sources. However, according to the IMF (2005) the overdraft facility policy has often been criticized for its negative effects by impairing the development of an innovative private financial sector and for making firm highly dependent on government support policy measures. Even though there have been some qualitative remarks on the effectiveness of the policy, an evaluation of the overdraft facility policy has not been conducted systematically in terms of methodology and data, especially in Eastern European Union Industrial firms. This study aims to fill the gap in the existing literature.

In this work, we evaluate the effect of the overdraft facility policy in terms of Human Capital (production workers trained), Technological Capital (expenditures of R&D), competitiveness (sales export level) and the firm's technical efficiency in the Eastern European Union Industrial firms, by comparing overdraft facilitated firms and non-overdraft facilitated firms. The amount of funds allocated to the overdraft facility policy is huge and the number of targeted firms is large. Therefore, we need to investigate its effectiveness and to provide background information for further evolution of the policy.

This work utilizes an original dataset that covers manufacturing firms in 11 Eastern Europe Countries (Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Moldova, Poland, Romania, Slovak Republic, and Slovenia). Moreover, we analyze the effectiveness of the overdraft facility in 4 industrial sectors (Beverages, Food, Garments, and Metals and machinery).

Methodologically, reliable policy evaluation should solve the 'selectivity' problem. According to Muthen and Joreskog (1983), selectivity problems can occur whenever one tries to estimate population parameters from a nonrandom sample. The sample may be nonrandom because only firms with certain characteristics are selected into the sample (sample selection), or because firms participate voluntarily in the sample (self-selection). Selective samples can also occur because firms fall out of the sample for various reasons, despite an initial random sample (attrition). According to Jaffe (2002), if we cannot control the selectivity problem, we might over- or under-estimate the true effects of the policy.

In order to deal with the selectivity issue, we adopt propensity score matching estimators, which have recently been applied to firm-level studies (Yasar, Rejesus 2005; Loof, Heshmati 2005; Oh et al. 2009). Propensity score matching was chosen because: (i) it reduces (although does not eliminate) selection biases, (ii) it reduces the limitation from matching on many observable variables for finite data, and (iii) it is best suited to the structure of the available data.

This study is organized as follows. The following section introduces the economic environment of the Eastern European Union Industrial firms and the existing overdraft facility policy schemes. Section 3 briefly explains the methodologies of Data Envelopment Analysis (DEA) Frontiers (with Bootstrap procedure) and propensity score matching. Section 4 describes the data and it presents the key descriptive statistics. The empirical results are discussed in Sect. 5. The final section summarizes and concludes this study.

2. Background

2.1. The Eastern European Union companies

The EU enlargement to 27 countries in 2004 and 2007 constitutes a historical benchmark in the forming of the European space. In contrast to previous enlargements, the entering of Eastern European countries has peculiar characteristics due to the large number of nations entering the EU and due to the heterogeneity in its parameters and levels of development (Hay 2003: 13).

In terms of rent per capita, the set of the countries of Eastern Europe was placed in 2004 in 4,380 Euros (current exchange rates) and 9,100 (PPP) Euros, respectively, which supposed 20% and 40% of the per capita income in the Europe of the fifteen. …

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