Does Access to Finance Improve Productivity? The Case of Italian Manufacturing

Many contributions have analyzed the implications of underdeveloped financial markets for economic growth and efficiency of production, emphasizing their role as a source of misallocation and highlighting their negative impact on firm dynamics and innovation. The phenomenon is particularly severe in economies characterized by high reliance on debt financing, asymmetric information and imperfect capital markets. This paper reviews the literature on the link between finance and total factor productivity (TFP) and presents some microeconomic empirical evidence in support of a negative relationship between a firm’s ability to access external funding and its productivity. We exploit financial accounts data from ORBIS and AMADEUS and focus on a sample of Italian manufacturing firms during the period 2005–2015. Our findings show that financing constraints negatively affect firms’ productivity, with important implications at the aggregate level. We also document that the sensitivity of TFP to credit constraints increased significantly as a result of the Great Recession, possibly explaining the stalling post-crisis Italian recovery.