In general, an important channel is linked to the access to financial services, which represents by the availability of financial infrastructure that more or less directly transfers the role of the financial sector to economic growth. Moreover, the research is quite different in relation to the research specification, because many of the previous studies had generally focused on the connection between financial deepening and economic growth (Soedarmono, et al (2015), Trinugroho et al (2015) , Subandono (2015), Jayaratne and Strahan (1996)). To bridge this gap, this study introduces two fundamental novel aspects compared to the previous study.
First, this study highlights the interaction of access to the local financial development on firm performance across the Indonesian archipelago. Finally, Section 6 provides a concluding remark regarding the overall findings and major implications that can be drawn from this study. Parallel to these empirical findings indicate that development path needs a better access of financial services to the local stakeholders (which can be either households or firms) to improve economic performance, especially in developing countries that have a significant amount of population.
According to the World Bank (2008), the availability of external financing is positively associated with the number of start-ups, an important indicator of entrepreneurship as well as with firm dynamism and innovation. By dividing the region into these two categories, we will also be able to test whether a relatively concentrated industrialized region has a different impact on access to financial services as a result of branch density. Therefore, the banks in the socio-economically less developed regions have less incentives for the financial diffusion, since the information as well as the quality of borrowers is insufficient.
Under this condition, this study believes that the main control factor should potentially help explain the interplay between firm performance and access to financial services at the provincial level in Indonesia.
Estimation
However, in contrast to Fafchamps and Schündeln (2013), this paper uses only two possible cut-offs to identify less constrained firms. First, firm size indicator, a firm with a threshold of at least 100 employees is categorized as large firms. Second, foreign ownership complements the manufacturing firm size, firms with more than 50% threshold in the foreign ownership are identified as large firms.
The logic behind this threshold is that foreign firms are less likely to be constrained by local financial markets. For simplicity purposes, less constrained firms will then be labeled as large firms and firms with a workforce below 100 employees will be labeled as small firms. This means that access to external financing is vital for businesses facing growth opportunities.
At the firm level, the correlation between performance and access to finance is subject to reverse causation as banks are expected to lend to firms with high performance and prospects. To deal with this issue of reverse causality, we follow the same strategy proposed by Fafchamps and Schündeln (2013). Briefly, to measure business activity within regions, model (6) is estimated only for small firms and excludes large ones.
Among the possible theoretical reasons for the better access of larger companies to external financing are, for example, information problems in such a way that it is cheaper for banks to obtain reliable and/or.
RESULT AND ANALYSIS 4.1. Descriptive Statistics
Firm-Level Estimations 1. Baseline Result
If we separate these interaction terms, the coefficient of branch density at t-1 is positive and statistically significant in influencing firm performance. However, this condition seems to be significant only in the western part of Indonesia and not in the eastern part. The magnitude of this coefficient is 1.49 for Western Indonesia; means a one percentage point increase in branch density will increase firm performance by 1.49%.
Next, this study also investigates whether local financial development approximated by branch density is also parallel to the level of economic development, especially in the western part of Indonesia. As a direct measure of the level of development, this study has put emphasis on some variables such as the poverty rate (pov_rate), so once again, after evaluating with some controls of the level of development, this study does not find a significant result on the interaction of the variables (lbranch_gopvad ) as empirically found for the case of Morocco in the previous study by Fafchamps and Schündeln (2013).
At some point, after controlling for time-invariant factors, this study shows that the level of development is closely related to the level of the branch density, as evidenced by the stable increase in its magnitude when control variables are added to the core equation (6). This study also estimates the equation for the eastern part of Indonesia and finds that many explanatory variables are not statistically significant even after adjusting for fixed-effect factors14. For example, in column (6), if the poverty rate in this region increases by one percentage point, business performance will fall by 12.37%.
In addition, real wages also have a significant and negative impact on firm performance during the sample period. From this overall situation, it implies that small business expansion within Indonesian provinces is closely related to the level of economic development, i.e. these empirical findings taken together indicate that the level of economic development within regions is more important than financial access to small business performance.
This study found a similar finding with Fafchamps and Schündeln (2013), as shown in Table 4, the channel in which access to financial services works through labor productivity.17 The impact of affiliates is estimated to be positive on output growth, although the impact on employment is negative, if we estimate the sum of these two impacts, it will lead to higher productivity growth. Overall, this study generally finds that the level of socio-economic development in Indonesia is negatively related to small business performance, for example, higher inflation will cause an increase in marginal costs and therefore lower small business productivity . Taking this information together with the previous analysis in section 5.1.2, this study generally shows that levels of economic development, such as poverty and inflation, are closely related to small business performance.
Regional-Level Estimation
This empirical finding is probably due to the investment in machinery and/or productive equipment, whereas it is also found in the case of Morocco by Fafchamps and Schündeln (2013). When small businesses have better access to the financial institutions, the companies will potentially invest in productive assets. Essentially, if small enterprises have better access to the financial services, the enterprises will channel the capital (borrowed from the banking institutions) on asset productivity to achieve a higher level, as confirmed by these empirical results in the provinces of Indonesia.
In addition, we can also draw another important implication from Table 5 regarding the impact of financial access on firm performance. The coefficient of business density (lbranch1) on employment growth is positive and statistically significant. This evidence indicates that if small businesses have better access to financial services, it will only work through the employment channel.
This evidence is consistent with the theoretical framework proposed by Amable and Chatelain (2001), which implies that when banks' branch density increases within the region, small firms that have access to the financial services transfer their capital from banking institutions to a positive labor absorption to help country get out of the poverty trap.
CONCLUSION
East Asia Forum : Economics, Politics and Public Policy in East Asia and the Pacific. available at http://www.eastasiaforum.org regulatoryconstraints-to-financial-inclusion-in-indonesia). Determinants of interregional differences in financial deepening. available at https://hal-unilim.archives-ouvertes.fr/hal-01114255). Measuring Financial Access Around the World (available at http://www.worldbank.org/en/programs/globalfindex).
Descriptive statistics All firms Large firmsSmall firms ObsAverage firm Identifier year time code Province Manufacturing sectors Firm size Employment Output Value added growth opportunity vad growth opportunity output growth opportunity employment GDP deflator vad / GDP deflator output / GDP deflator Branch density poverty rate population density household density inflation rate (y.o.y) unemployment rate wage (local currency) human development index (hdi) employment rate distance log of vad log of actual vad log of output log of actual output log of employment log of branch density log of population density log of household log of wage log of hdi log of distance growth rate of vad growth rate of output growth rate of employment .
