Bank market power and firm creation: a multi-country analysis

Abstract

Purpose – The purpose of this paper is to investigate the relationship between bank market power and firm creation, which represents a debated issue in the economic literature, still lacking empirical evidence. Design/methodology/approach – The analysis is carried out by taking an international perspective, using different measures of banking competition, and controlling for a large set of determinants suggested by the variegate literature on firms’ birth drivers. Findings – The main finding suggests that credit market competition may benefit firms’ creation, as the relationship between the latter and bank market power – when statistically significant – appears to be negative. In addition, the detrimental impact of market power appears greater (in absolute terms) when departing from higher levels of banking competition. Research limitations/implications – The empirical evidence seems supporting the competitive position in the debate on the role of banking competition. Furthermore, the authors reckon that the findings reinforce the belief of a crucial role played by the availability of funds for nascent firms, with evident implications for the policy strategies more appropriate to foster entrepreneurship. The “fashion” followed by several countries of lowering administrative entry barriers (van Stel et al., 2007) needs to be reappraised, pondering also means to enrich resources availability. Originality/value – To the best of the knowledge, the paper is the first one addressing the issue of the role of bank market structure on firms’ creation in a multi-country setting.