Liping Lu, Tilburg University: Informal or Formal Financing? Or Both? First Evidence on the Co-Funding of Chinese Firms
The current financial crisis has reopened the debate on the impact of informal versus formal
finance on firm growth in developing countries. Using unique survey data we find that
informal finance in China is associated with higher sales growth for small firms, but lower
sales growth for large firms. Furthermore, we find a complementary effect between informal
and formal finance for the sales growth of small firms, but not for large firms. Co-funding
seems an optimal choice for small firms, with informal finance having the informational and
monitoring advantage and formal finance coming at a lower cost. Our findings therefore cast
doubts on existing government policies in developing countries that merely repress informal
Key Words: Informal Finance, Formal Finance, Co-funding, Sales Growth
JEL Codes: G21, G32, P2.
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