German banks as intermediaries in the allocation process of public start-up assistance (90)

Theme Track: Innovation and New Technologies - New Firm Formation

Authors:
Almus, Matthias ; Egeln, Juergen ; Engel, Dirk ; Prantl, Susanne

Capital markets are characterized by imperfections that discriminate against small and medium sized firms (SME) and are one source of the high failure probability of start-ups and the resulting missing potential to create more employment. This result is found in several empirical studies (see for example Harhoff and Koerting, Journal of Banking and Finance 1998). These imperfections seriously impede the start-up of new firms even in the case of a promising business concept. On the one hand, potential entrepreneurs often cannot raise the required amount of equity and outside capital to carry out necessary investments. On the other, some entrepreneurs have to pay high interest rates and risk premiums on the borrowed capital where the amount depends on characteristics of the potential entrepreneurs and the firms to be funded. These problems will become more severe in view of the introduction of the Basel II Accord. The Deutsche Ausgleichsbank (DtA) supports entrepreneurs and firm start-ups in the segment `entrepreneurship/start-up' (Existenz-/Unternehmensgründung) to maintain or even to raise the number of new jobs created by new firms by increasing their survival probability as well as to help to overcome the mentioned capital market imperfections. Especially the ERP equity capital assistance program as well as the ERP business start-up program and the DtA business start-up program are important since they provide firms with additional investment means on favourable terms. This empirical study for West Germany uses data from the DtA as well as from the ZEW Entrepreneurship Study and the ZEW Foundation Panel West to examine the probability to receive start-up loans issued by the DtA. Firms have to apply for these start-up loans via their firm banks. Hence, main concern is the role of German banks played in this allocation process. We separate banks in three main groups: saving banks (Sparkassen), credit cooperatives (Genossenschaftsbanken) and private banks (Privatbanken) as firm banks (Hausbank). First, we use a probit model to examine the influence of several characteristics on the probability to receive start-up loans by the DtA on the firm level. Other things equal the existence of a saving bank or credit co-operative as firm bank increases significantly the probability of gathering loans from the DtA `entrepreneurship/start-up' support schemes. Second, we tested the firm banks influence on a more aggregated level. Using the number of DtA start-up loans allocated in the 328 West German districts as endogenous variable we assess whether the bank density in the districts or the particulars of one's bank account as exogenous variables have a significant influence. It turns out that the density of saving banks and credit co-operatives significantly increases the number of start-up loans allocated in the West German districts. Moreover, districts where many firms have saving banks or credit cooperatives as firm banks realize other things equal a higher number of DtA start-up loans for firm foundations. Using two different econometric approaches and different databases the results assess the a priori hypothesis that saving banks and credit co-operatives play an important role in financing the German SME sector that is essential for the whole economy. The effects found have ceteris paribus character, since beside the bank information we include many other explaining variables. Many of them also have a significant influence.

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