Skip to main content
Log in

Social capital and firms’ choice of financing under credit constraints: microeconomic evidence from Pakistan

  • Research Article
  • Published:
DECISION Aims and scope Submit manuscript

Abstract

This study contributes to the literature by investigating the impact of credit constraints (CCs) on firms financing options using panel data of electrical fittings cluster over the period of two waves of survey 2008 and 2017. The analysis is based on probit, probit-random effect (RE), and recursive bivariate probit models. The study has employed comprehensive definitions of CCs and informal financing that cover supply- and demand-side factors of formal CCs as well as informal sources of financing. The parameter estimates on owner schooling, friends in the same industry, firm size and marketing channels are negative and statistically significant implying that these factors help to relax CCs. Our study also finds out that the CCs entrepreneurs prefer informal financing in the Sargodha cluster. Moreover, findings also reveal that social capital positively influences informal financing, whereas human capital has a negative effect on informal financing.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. While human capital is a made up of an individual’s attributes, for instance, education, skills, experience, social capital is a measure of the value of resources, for instance, social interactions, networks, etc.).

References

  • Ahlstrom D, Bruton GD (2006) Venture capital in emerging economies: networks and institutional change. Entrepreneursh Theory Pract 30(2):299–320

    Article  Google Scholar 

  • Akoten J, Sawada Y, Otsuka K (2006) The determinants of credit access and its impacts on micro and small enterprises: the case of garment producers in Kenya. Econ Dev Cult Change 54(4):927–944

    Article  Google Scholar 

  • Allen TJ, Gloor P, Colladon AF, Woerner SL, Raz O (2016) The power of reciprocal knowledge sharing relationships for startup success. J Small Bus Enterp Dev 23(3):636–651

    Article  Google Scholar 

  • Arif BW, Sonobe T (2012) Virtual incubation in industrial clusters: a case study in Pakistan. J Dev Stud 48(3):377–392

    Article  Google Scholar 

  • Baltagi BH (2009) A companion to econometric analysis of panel data. Wiley, Hoboken

    Google Scholar 

  • Banerjee AV, Duflo E (2009) The experimental approach to development economics. Annu Rev Econ 1(1):151–178

    Article  Google Scholar 

  • Ben-Porath Y (1980) The F-connection: families, friends, and firms and the organization of exchange. Popul Dev Rev 6(1):1–30

    Article  Google Scholar 

  • Carter MR, Castillo M (2009) Trustworthiness and social capital in South Africa: analysis of actual living standards data and artifactual field experiments. Econ Dev Cult Change 59(4):695–722

    Article  Google Scholar 

  • Coleman JS (1988) Social capital in the creation of human capital. Am J Sociol 94:S95–S120

    Article  Google Scholar 

  • Conning J (2001) Of pirates and moneylenders: product market competition and the depth of lending relationships in a rural market in Chile. Department of Economics Working Papers, 2000–08, Department of Economics, Williams College

  • Durlauf SN, Fafchamps M (2005) Social capital. In: Handbook of economic growth, Chapter 26

  • Fafchamps M (2004) Rural poverty, risk and development. Edward Elgar Publishing, Cheltenham

    Google Scholar 

  • Fafchamps M, Minten B (2002) Returns to social network capital among traders. SSRN Electron J. https://doi.org/10.2139/ssrn.250762

    Article  Google Scholar 

  • Fairlie RW, Robb A (2007) Families, human capital, and small business: evidence from the characteristics of business owners survey. ILR Rev 60(2):225–245

    Article  Google Scholar 

  • Fornoni M, Arribas I, Vila JE (2012) An entrepreneur's social capital and performance. J Organ Change Manag 25(5):682–698

    Article  Google Scholar 

  • Fukuyama F (1995) Trust: the social virtues and the creation of prosperity, vol 99. Free press, New York

    Google Scholar 

  • Fukuyama F, Institute IMF (1999) Social capital and civil society. International Monetary Fund, IMF Institute, Washington, DC

    Google Scholar 

  • Ghate P (1992) Interaction between the formal and informal financial sectors: the Asian experience. World Dev 20(6):859–872

    Article  Google Scholar 

  • Giné X (2011) Access to capital in rural Thailand: An estimated model of formal vs. informal credit. J Dev Econ 96(1):16–29

    Article  Google Scholar 

  • Hayami Y (2009) Social capital, human capital and the community mechanism: toward a conceptual framework for economists. J Dev Stud 45(1):96–123

    Article  Google Scholar 

  • Heikkilä A, Kalmi P, Ruuskanen OP (2016) Social capital and access to credit: evidence from Uganda. J Dev Stud 52(9):1273–1288

    Article  Google Scholar 

  • Humphrey J, Schmitz H (1998) Trust and inter-firm relations in developing and transition economies. J Dev Stud 34(4):32–61

    Article  Google Scholar 

  • Ishise H, Sawada Y (2009) Aggregate returns to social capital: estimates based on the augmented augmented-Solow model. J Macroecon 31(3):376–393

    Article  Google Scholar 

  • Karlan DS (2007) Social connections and group banking. Econ J 117(517):F52–F84

    Article  Google Scholar 

  • Le NT, Nguyen TV (2009) The impact of networking on bank financing: the case of small and medium-sized enterprises in Vietnam. Entrepreneursh Theory Pract 33(4):867–887

    Article  Google Scholar 

  • Lin JY, Sun X (2006) Information, informal finance, and SME financing. Front Econ China 1:69–82

    Article  Google Scholar 

  • Maddala GS (1983) Limited-dependent and qualitative variables in econometrics. Econometric Society Monograph, vol 3. Cambridge University Press, Cambridge

    Google Scholar 

  • Madestam A (2014) Informal finance: a theory of moneylenders. J Dev Econ 107:157–174

    Article  Google Scholar 

  • Matemilola BT, Bany-Ariffin AN, McGowan CB (2013) Unobservable effects and firm's capital structure determinants. Manag Finance 39(12):1124–1137

    Google Scholar 

  • Meyer KE, Nguyen HV (2005) Foreign investment strategies and sub-national institutions in emerging markets: evidence from Vietnam. J Manag Stud 42(1):63–93

    Article  Google Scholar 

  • Nadvi K (1999) Shifting ties: social networks in the surgical instrument cluster of Sialkot. Pakistan Dev Change 30(1):141–175

    Article  Google Scholar 

  • Nguyen N, Luu NT (2013) Determinants of financing pattern and access to formal -informal credit: the case of small and medium sized enterprises in Viet Nam. J Manag Stud 5(2):240–259

    Google Scholar 

  • Nguyen TV, Le NTB, Freeman NJ (2006) Trust and uncertainty: a study of bank lending to private SMEs in Vietnam. Asia Pac Bus Rev 12(4):547–568

    Article  Google Scholar 

  • OECD (2000) Centre for Educational Research and Innovation National Center on Adult Literacy (USA) NCAL. (2000). Learning to bridge the digital divide. OECD, Organisation for Economic Co-operation and Development, Paris

  • Paal B, Wiseman T (2011) Group insurance and lending with endogenous social collateral. J Dev Econ 94(1):30–40

    Article  Google Scholar 

  • Parker SC, Van Praag CM (2006) Schooling, capital constraints, and entrepreneurial performance. J Bus Econ Stat 24(4):416–431

    Article  Google Scholar 

  • Pham T, Talavera O (2018) Discrimination, social capital, and financial constraints: the case of Viet Nam. World Dev 102:228–242

    Article  Google Scholar 

  • Putnam RD (1993) What makes democracy work? Natl Civic Rev 82(2):101–107

    Article  Google Scholar 

  • Putnam R (2001) Social capital: measurement and consequences. Can J Policy Res 2(1):41–51

    Google Scholar 

  • Return (2013) Impact of Leverage and Managerial Skills on Shareholders’ Procedia Economics and Finance7: 103–115

  • Robb AM, Fairlie RW (2007) Determinants of business success: an examination of Asian owned businesses in the United States. IZA, Bonn

    Google Scholar 

  • Sonobe T, Ōtsuka K (2006) Cluster-based industrial development: an East Asian model. Palgrave Macmillan, New York

    Book  Google Scholar 

  • Sonobe T, Otsuka K (2011) Cluster-based industrial development: a comparative study of Asia and Africa. Palgrave Macmillan, New York

    Book  Google Scholar 

  • Steel WF, Aryeetey E, Hettige H, Nissanke M (1997) Informal financial markets under liberalization in four African countries. World Dev 25(5):817–830

    Article  Google Scholar 

  • Storey DA (2018) Understanding the small business sector. Routledge, Abingdon

    Google Scholar 

  • Talavera O, Xiong L, Xiong X (2012) Social capital and access to bank financing: the case of chinese entrepreneurs. Emerg Mark Finance Trade 48(1):55–69

    Article  Google Scholar 

  • Tang S (1995) Informal credit markets and economic development in Taiwan. World Dev 23(5):845–855

    Article  Google Scholar 

  • Tenev S, Carlier A, Chaudry O, Nguyen QT (2013) Informality and the playing field in Vietnam's business sector. World Bank and the International Finance Corporation, Washington, DC

    Google Scholar 

  • Ullah S, Majeed MT, Hafeez M (2019) Education, experience, social network and firm survival: the case of the electrical fittings cluster in Sargodha, Pakistan. Decision 46(3):267–278

    Article  Google Scholar 

  • Ullah S, Majeed MT, Arif BW (2020) The evolution of an electrical fittings industrial cluster in Pakistan. GeoJ 1–12

  • Woodruff CM, Zenteno R (2001) Remittances and microenterprises in Mexico. SSRN Electron J. https://doi.org/10.2139/ssrn.282019

    Article  Google Scholar 

  • Wooldridge JM (2010) Econometric analysis of cross section and panel data: [2]. MIT Press, Cambridge

    Google Scholar 

  • World Bank (2015) Investment climate reforms: an independent evaluation of World Bank Group support to reforms of business regulations

  • Zhang G (2008) The choice of formal or informal finance: evidence from Chengdu, China. China Econ Rev 19(4):659–678

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Sana Ullah.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Ullah, S., Majeed, M.T. & Arif, B.W. Social capital and firms’ choice of financing under credit constraints: microeconomic evidence from Pakistan. Decision 48, 3–13 (2021). https://doi.org/10.1007/s40622-020-00256-4

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s40622-020-00256-4

Keywords

JEL Classifications

Navigation