Incomplete capital markets and credit constraints are often considered obstacles to economic growth, thus motivating government interventions. One such intervention is governmental bank loans targeting credit-constrained small and medium-sized enterprises (SMEs). Using a unique data set, this paper contributes to the literature by studying how these loans affect the targeted firms.
However, it is less clear to what extent these interventions result in firm growth and whether governmental loans should target firms that are not receiving private bank loans (the extensive margin) or work in conjunction with private bank loans (the intensive margin). Using a unique data set with information on state bank loans targeting credit-constrained SMEs with and without complementary private bank loans, this paper contributes to the literature by studying how these loans affect the targeted firms. The results suggest that positive effects are found on firm productivity and sales for firms with 10 or fewer employees, while no evidence is found of employment effects. This lack of employment effect suggests that a lack of external credit is not the main obstacle to SME employment growth.