Financing obstacles for SMEs: the role of politics

Purpose Using data on over 7500 units from the World Bank Enterprise Survey (WBES) for 2014, the paper assesses the impact of political connections on SME financing obstacles in India. Methodology Since the dependent variable has a meaningful response order and involves several categories, it is appropriate to use the ordered logit model (OLM). We employ the OLM of the STATA program for the estimation process. Findings The findings indicate that political connections help alleviate higher-order financing obstacles. In terms of magnitude, senior managers with political connections are 2.5 percentage points less likely to state that there are no financing obstacles, and about 1 percentage point is more likely to state it as a moderate or major obstacle. As well, they are 0.6 percentage point more likely to mention it as a severe obstacle. These results differ across firm ownership type (i.e., male-versus female-owned) and firm size classes and when additional state characteristics are taken on board. Limitations The analysis is limited to a single year based on data availability. A much richer analysis would need to assess how such political connections play out over time and its consequences for SME behaviour. Second, our measure of political connection is indirect, since no other measure is reported in the data. Originality To the best of our understanding, this is one of the earliest studies for a leading emerging economy to assess the interlinkage between SME behaviour and their political connections.