Bustos, Garber and Ponticelli (2016) study the allocation of capital across regions, sectors and firms. In particular, they assess to what extent growth in agricultural productivity can lead to an increase in the supply of credit in industry and services.
For this purpose, the authors identify an exogenous increase in agricultural pro fits due to the adoption of genetically engineered soy in Brazil. They find that regions with larger increases in agricultural productivity experienced larger increases in local bank deposits. However, there was no increase in local bank lending. Instead, capital was reallocated towards other regions through bank branch networks. This increase in credit supply aff ected fi rms’ credit access through the extensive and intensive margin.
First, regions with more bank branches receiving funds from soy areas experienced an increase in credit market participation of small and medium sized fi rms. In addition, banks experiencing faster deposit growth in soy areas increased their lending to firms with whom they had preexisting relationships. In turn, these firms grew faster in terms of employment and wage bill. Their estimates imply that the elasticity of fi rm growth to credit is largest in the manufacturing sector.
These findings suggest that agricultural productivity growth can lead to structural transformation through a financial channel.
This research was funded under the Private Enterprise Development in Low-Income Countries (PEDL) Programme
Bustos, P., Garber, G. and Ponticelli, J. (2016), Capital Allocation Across Regions, Sectors and Firms: Evidence from a Boom in Agriculture, PEDL, 53p