24 Jan 2012Working Paper Summaries

What Do Development Banks Do? Evidence from Brazil, 2002-2009

by Sergio G. Lazzarini, Aldo Musacchio, Rodrigo Bandeira-de-Mello and Rosilene Marcon
Private firms in developed and developing markets find themselves competing with the so-called "national champions"—private and state-owned enterprises that receive entitlements, mostly trade protections and/or subsidized credit from the government. Most of these national champions get support by proposing long-term projects with large capital investment that would usually not be easy to fund using private capital. This paper, written by Research by Sergio G. Lazzarini, Aldo Musacchio, Rodrigo Bandeira-de-Mello, and Rosilene Marcon, uses evidence from Brazil to look at what happens to firm performance, investment, and financial expenditures when companies get subsidized credit from the Brazilian National Bank of Economic and Social Development, known as BNDES. Key concepts include:
  • BNDES is one of the largest development banks in the world, but there was no previous comprehensive study tracking the effects of its loans and equity investments.
  • This study finds that BNDES' loans and equity do not seem to affect firm-level operational performance and investment decisions, although the loans and equity do reduce firm-level cost of capital due to the governmental subsidies accompanying loans.
  • Examining the selection process through which BNDES' capital is allocated to firms, the authors find that BNDES apparently selects firms with good operational performance but also provides more capital to firms with political connections (measured as campaign donations to politicians who won an election).
  • Even so, there is no evidence that BNDES is systematically bailing out firms. In general, BNDES appears to be selecting firms with capacity to repay their loans, as regular commercial banks would do.

Author Abstract

While some authors view development banks as an important tool to alleviate capital constraints in scarce credit markets and unlock productive investments, others see those banks as conduits of cheap loans to politically-connected firms that could obtain capital elsewhere. We test these contrasting views using data on loans and equity allocations in the period 2002-2009 by the Brazilian National Development Bank (BNDES), one of the largest development banks in the world. In our fixed effect regressions, we find that BNDES' allocations do not seem to affect firm-level operational performance and investment decisions, although they do reduce firm-level cost of capital due to the governmental subsidies accompanying loans. Next, examining the selection process through which BNDES' capital is allocated to firms, we find that BNDES apparently selects firms with good operational performance but also provides more capital to firms with political connections (measured as campaign donations to politicians who won an election). Yet, we do not find evidence that BNDES is systematically bailing out firms. In general, BNDES appears to be generally selecting firms with capacity to repay their loans, as regular commercial banks would do.

Paper Information

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