AppendixA. Data Sources and Definitions
Appendix B. Euler Equation Specification
Appendix C. Estimating Total Factor Productivity
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)| false Masso, J., R. Eamets, and K. Philips, 2004, “ Firm Demographics and Productivity Dynamics in Estonia,” University of Tartu Faculty of Economics and Business Administration Working Paper No. 25 ( Tartu, Estonia: University of Tartu, Faculty of Economics and Business Administration).
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Moreno Badia (MMorenobadia@imf.org): International Monetary Fund; Slootmaekers (Veerle.Slootmaekers@oecd.org): Organisation for Economic Co-operation and Development and Catholic University of Leuven, LICOS Centre for Institutions and Economic Performance. We would like to thank Larissa Merkulova and Kadri Rohulaid of the Centre of Registers and Infosystems for the data and valuable clarifications on the Registrar’s Office database. We also thank Franek Rozwadowski, and seminar participants at the International Monetary Fund, the European Commission, LICOS and the CAED conference in Budapest for helpful comments and suggestions. Most of all, we would especially like to thank Nobuo Yoshida for his thoughtful insights and ideas. The views expressed herein are those of the authors and should not be held to represent those of the institutions of affiliation.
Access to finance can clearly affect capital accumulation. However, the literature has identified innovation and technological progress as the main drivers of growth over extended periods of time (see, for example, Solow, 1957). In fact, Moreno Badia (2007) finds that most of Estonia’s income convergence with the EU-15 since the mid-1990s stems from closing the gap in total factor productivity.
This could be due to financial frictions but may also be explained by the fact that, since 2000, retained earnings are not taxed in Estonia.
According to the same report, access to loans is hindered by many factors, including, insufficient guarantees or own capital, a short financial history or insufficient business plan, and financial institutions’ disproportionally large costs of processing small-scale loans.
A previous version of this paper compares the results of this new approach with those of a two-equation approach, highlighting significant differences (see, Moreno Badia and Slootmaekers, 2008).
The simultaneity bias arises because investors may ration credit to the less productive firms.
See Kornai (1979, 1986) for a discussion on soft budget constraints. A series of papers have found that financial constraints were absent or limited in some transition countries and have argued this was due to the persistence of soft budget constraints (see, for example, Budina et al., 2000; Lizal and Svejnar (2002); and Konings et al., 2003).
We use only two lags rather than the full possible instrument matrix to avoid the problem of overfitting.
Only for sector “renting of machinery and computer” (Ind. 9) we cannot reject the presence of second-order autocorrelation at the 5 percent significance level.
The overall conclusions are similar even if we do not censor the score of financial constraints to zero. A minority of firms has a negative score, but the industry means and medians remain positive. Also, the results for the rest of the analysis are similar.
A similar approach is used in Fernandes (2007) who treats trade policy as a state variable. In our model, firms choose materials knowing the degree of financial constraint they faced at the end of the previous period, the current capital stock, and the current productivity level, including the part unobserved to the econometrician, ωit.
Alternatively, we could have followed Olley and Pakes (1996) and use investment as a proxy variable for productivity. However, given the substantial number of observations with zero or missing investment this would have resulted in a significant efficiency loss.
In a similar setting, Van Biesebroeck (2005) discusses the conditions under which the monotonicity conditions hold for an investment function that includes the firm’s export status as a state variable.
The use of estimated regressors at different stages of the procedure increases the final coefficients’ variability. Therefore, bootstrapped standard errors on the capital coefficient tend to be overestimated (Pakes and Olley, 1995). See Horowitz (2001) for an overview of the bootstrap estimation methodology.
Other differences are related to the underlying assumptions and estimation techniques. See Ackerberg et al. (2005) for a review and detailed discussion of the Olley-Pakes and Levinsohn-Petrin methodologies.
About 45 percent of the total number of observations in our dataset has zero or missing investment, whereas most firms report positive use of materials in each year.
The partially linear model in (C.3) can be estimated using OLS with a polynomial expansion in mit and kit to approximate for the unknown function φt(.), or using kernel estimators. The former approach not only has the advantage of being easier and faster to implement, Pakes and Olley (1995) and Levinsohn and Petrin (2003) report that the results of both approaches are very similar.