UMD study reveals both benefits and challenges of financial support for over 3,000 Chinese Small and Medium Businesses
Access to finance is often seen as a key driver for the growth of small businesses, but how does it impact the broader market? A new study published in the American Economic Review provides fresh insights into this important question. The study, titled "Indirect Effects of Access to Finance," was conducted by Jing Cai from the Department of Agricultural and Resource Economics (AREC) at the University of Maryland and Adam Szeidl from the Department of Economics at Central European University.
The researchers introduced a new loan product to small businesses in China, designed to be more accessible and attractive than existing options. These loans did not require collateral, had a simplified application process, and offered lower interest rates. The study involved 3,173 small and medium-sized enterprises (SMEs) across 78 retail markets. The researchers randomized which businesses had access to these loans and studied the effects over several years.
The findings were significant. Businesses that received the loans saw substantial improvements in sales, profits, product quality, and customer satisfaction. They could offer better products at lower prices, leading to increased consumer satisfaction. However, the study also revealed that competitors of these businesses often experienced decreases in their own sales and profits. This effect, known as business stealing, occurred because the borrowing businesses attracted more customers, pulling them away from their competitors.
Despite the success of the businesses that received loans, the overall benefit to the market’s producers was neutral. The gains of some businesses were offset by the losses of others. This highlights the complexities of financial interventions. While providing access to finance can significantly boost the performance of some businesses, it can also create challenges for their competitors. Policymakers need to consider these indirect effects when designing programs to support small businesses.
The importance of this study lies in its comprehensive analysis of both direct and indirect effects of financial support. It provides valuable insights for policymakers and economic planners aiming to foster sustainable and inclusive economic growth. Understanding these dynamics is crucial for designing programs that maximize benefits while minimizing unintended negative impacts on the broader market.
The full study is available in the American Economic Review for more details. Share this post to spread awareness about the latest economic research and its implications for business and policy.
