Institutions, financial development, and small business survival: evidence from European emerging markets

Abstract

In this paper, we traced the survival status of 94,401 small businesses in 17 European emerging markets from 2007-2017 and empirically examined the determinants of their survival, focusing on institutional quality and financial development. We found that institutional quality and the level of financial development impact the survival probability of the researched SMEs in statistically significant and economically meaningful ways. The evidence holds even when we control for a set of firm-level characteristics such as ownership structure, financial performance, firm size, and age. The findings are also uniform across industries and country groups and robust beyond the difference in assumption of hazard distribution, firm size, region, and time period.

Distressed Acquisitions: Evidence from European Emerging Markets

“…This approach makes it possible (i) to empirically assess the predictive power of the initial conditions and (ii) to avoid or significantly mitigate the issue of potential endogeneity or self-selection (we further deal with the issue by using the Heckman two-stage estimation procedure detailed below). A similar approach, with respect to initial conditions, was effectively used in analyses related to firm survival in European emerging markets (Baumöhl et al, 2019(Baumöhl et al, , 2020Iwasaki and Kim, 2020;Iwasaki and Kočenda, 2020;Kočenda and Iwasaki, 2020;Iwasaki et al, 2021), but otherwise the researched issues substantially differ. In those studies, quantitative analysis was done based on the Cox proportional hazards model (1972), and data of failed firms are analyzed within the framework of the survival analysis (Liu, 2012) to assess the impact of various factors on the failure/survival probability of failed firms.…”

“…In Europe, in the early 1990s, multinational firms from developed economies launched numerous acquisitions in connection with massive privatizations of state-owned companies during the economic transformation of Central and Eastern European (CEE) countries (Estrin et al, 2009;Meyer et al, 2009;Iwasaki and Mizobata, 2018). Recently, the global financial crisis (GFC) has hit hard CEE companies (Hanousek et al, 2015), leading many of them into financial distress and forcing some to exit the market (Baumöhl et al, 2019;Iwasaki and Kim, 2020;Iwasaki et al, 2021). Under these circumstances, takeovers by stronger counterparts represent a viable solution for restructuring the assets of distressed firms, as a takeover may serve as an emergency-resolution mechanism instead of bankruptcy (Stiglitz, 1972).…”

What do we know about small and medium enterprises’ survival in a post-global economic crisis context?

“…To determine whether the probability of SMEs' survival varies across firms of different sizes, type of business activity and market range, we first estimated the duration of firms' survival using a nonparametric method proposed by Kaplan and Meier (1958). The technique is commonly used in the analysis of firm survival (Bieszk-Stolorz, 2017), for example, by Iwasaki et al (2022) when analysing surveys on SME survival.…”

Business climate and firm exit in developing countries: evidence from Nigeria

“…For example, Hallward-Driemeier [48] used a dataset of enterprises operating in 27 Eastern European and Central Asian countries to establish that inefficiencies in the business environment, specifically, access to credit, the efficiency of public services, corruption, level of competition, and strength of property rights are associated with a higher risk of business exit. Similarly, Iwasaki et al [28] supported the premise that quality institutions and developed financial systems help improve firm longevity, using a dataset of 94,401 small enterprises in 17 European emerging markets from 2007 to 2017. In the same manner, Klapper and Richmond [29] used data from registered businesses in Cote d'Ivoire for the period 1976-1997 to show that the risk of firm exit increases with types of reforms, while the firm likelihood of survival increases monotonically with firm size and better economic performance, while Muzi et al [30] established that excessive regulation proxy by the amount of time senior executive spent dealing regulatory requirements increases the risk of firm exit during the Covid-19 pandemic.…”

“…Generally, these studies conclude that an unfriendly business environment harms firm productivity, raises costs and risks of doing business, and creates barriers to competition. However, studies that examine the importance of business climate in determining firm survival/exit remain sparse in literature (with exception of [28][29][30][31]. Even though the possibility abounds that an unfriendly business climate can impede survival and/or increase exit, most business survival literature focused on the internal factors that explain firm survival (e.g.…”