The limits of lending: Banks and technology adoption across Russia

Çağatay Bircan, Ralph De Haas 15 May 2015

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Firm innovation is an important driver of productivity and economic growth (Aghion and Howitt 1992). In countries close to the technological frontier, innovation entails R&D and the invention of new products and technologies. In less advanced economies, innovation mostly involves firms’ adopting and adapting of existing products and processes. As firms adopt products and processes that were developed elsewhere, technologies spread across and within countries.

Despite the central role of firm innovation in determining wealth, the mechanisms that underpin the spread of products and production processes remain poorly understood. This column uses data on a large sample of Russian firms to focus on one such mechanism – the impact of credit constraints on technological adoption. As in other large emerging markets like India and China, Russian firms continue to be plagued by credit constraints. At the same time, many firms perform poorly when it comes to adopting technology. The question is whether this second observation can be explained by the first.

Dissecting the link between local banking and firm innovation

This column is based on a rich dataset with information on the demand for and supply of bank credit in a regionally representative sample of 4,220 Russian firms (see Bircan and De Haas 2015 for more details). The data contain detailed information on firms’ innovation activities, including R&D and the adoption of new products, processes, and organisational structures.

We match these firm-level data with two new geographical datasets on Russian credit markets. The first contains information on the contemporaneous location of over 45,000 bank branches (Figure 1). The second dataset provides historical information on the local presence of so-called specialised banks or ‘spetsbanks’ (see Berkowitz et al. 2014). The geographical variation in spetsbank presence reflects bureaucratic power struggles just before the collapse of the Soviet Union and is unrelated to economic conditions, past or present. Both the historical and contemporaneous variation in the spatial distribution of banks can be used to explain differences in firms' ability to access credit and, in a second step, their innovation activity.

Figure 1. Bank branches across Russia

Notes: This figure shows the geographical location of bank branches across Russia in 2011. Each blue dot indicates a bank branch. The separate western enclave is Kaliningrad. Source: EBRD BEPS II Survey.

Main findings

A two-stage analysis of these combined firm- and bank-level data yields four main insights.

  • First, especially small and opaque firms are less credit constrained in local markets where for historical (and exogenous) reasons the number of bank branches per capita is higher, branch ownership is more concentrated, and foreign banks have a higher market share.
  • Second, less stringent credit constraints translate into more technology adoption at both the extensive and intensive margins.

Interestingly, while access to credit allows firms to introduce products and processes that are new to them, these technologies were typically already available in the market that the firm operates in. This suggests that access to credit helps technologies to diffuse further within but not so much across regional and national borders. The data also show that firms tend to make technological advances by cooperating with others, in particular suppliers. This is in line with the idea that imports are an important channel of technology diffusion (Keller 2004). With easier access to credit, firms are also more likely to simply acquire external knowledge. This includes the purchasing or licensing of inventions, patents or know-how to start the production of a new product or process.

  • Third, a reduction in credit constraints does not lead to more in-house R&D or to more patent or trademark applications.

This suggests that bank credit does not allow firms to push the technological frontier itself. The absence of any impact of credit on R&D does not simply reflect that Russian firms do not undertake R&D. Both in terms of patents granted and in terms of R&D expenses, Russia lags behind the developed world but leads many other emerging markets.

  • Fourth, additional results indicate that foreign-owned banks play a special role in the technological upgrading process.

Not only is innovation activity higher in localities with more foreign banks but also conditional on receiving credit, borrowing from a foreign as opposed to a domestic bank further boosts firm innovation.

Conclusions

Many emerging markets continue to display low levels of technological adoption and hence fail to realise their ‘advantage of backwardness’ (Gerschenkron 1952). This column has used firm-level data to test whether credit constraints can prevent countries from exploiting the global pool of available technologies. Our results show that where banks ease local credit constraints, firms indeed innovate more at the extensive and intensive margin. We find no direct impact of bank credit on in-house R&D. The role of banks in pushing the technological frontier appears limited. We do find, however, that banks help firms to adopt products and processes that were new to them but that were already available in their local market.

Taken together, these findings indicate that better access to bank credit can facilitate the diffusion of new products and production methods within emerging markets. Without access to credit, firms can remain stuck in a pattern of low productivity and weak growth, even after other businesses in their country have managed to upgrade their operations. While R&D and new inventions may need venture capital or private equity to take off, banks can help fund process and other forms of innovation. This suggests that countries such as Russia could benefit from a two-pronged approach in which government efforts to stimulate R&D are complemented by bottom-up and bank-funded private innovation.

References

Aghion, P and P Howitt (1992), “A Model of Growth Through Creative Destruction”, Econometrica 60, 323–51.

Berkowitz, D, M Hoekstra, and K Schoors (2014), “Bank Privatization, Finance, and Growth”, Journal of Development Economics 114, 93-106.

Bircan, C and R De Haas (2015), “The limits of lending: Banks and technology adoption across Russia”, EBRD Working Paper No. 178, European Bank for Reconstruction and Development, London.

Gerschenkron, A (1952), Economic Backwardness in Historical Perspective, in B Hoselitz (ed.), The Progress of Underdeveloped Areas, University of Chicago Press.

Keller, W (2004), “International Technology Diffusion”, Journal of Economic Literature XLII, 752-782

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Topics:  Productivity and Innovation

Tags:  credit constraints, R&D, firm innovation, Russia

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