The Value of Business Networks in Emerging Economies:An Analysis of Firms’ External Financing Opportunities

The paper argues that networked firms are likely to have an advantage in securing externalfinance in countries with weak legal and judicial institutions since it helps financial institutionsto minimize the underlying agency costs of lending. An analysis of recent BEEPS data fromfifteen Central and Eastern European (CEE) countries lends some support to this hypothesis.Even after controlling for other factors, firms affiliated to business associations are more likelyto secure bank finance. Importance of being associated with business networks is particularlyevident among firms who borrow from private domestic and foreign banks, as these newbanks attempt to minimize costs of adverse selection. Networking however discriminatesagainst the small and medium sized firms’ access to bank loans in the CEE regions. Resultsare robust in both single cross-section and panel data analyses....