Formal Finance, Informal Finance And Firm Growth

Different financial environment in BRIC lead to different ways of firm financing, which is one of the most vital factors affecting firm growth. Firstly, based on social reality and former scholars' research conclusions, this paper gives a qualitative research on financing mode, which is divided into formal finance and informal finance. Then we make a statistical table on the financing mode of BRIC according to exiting data. Secondly, this paper use an OLS Model and a Heckman two-step Model to carry out an empirical study on the relationship between formal finance and firm growth of BRIC. The result of OLS shows that formal finance has significant positive effect on firm growth for all four countries. Controlling the selection effect, we find that the effect of formal finance has been underestimated, which proves that bank loaning is inefficient allocation. Finally, since different scholars have different definitions on informal finance, we divide informal finance into three kinds and examine the relation between informal finance and firm performance, which shows obvious national differences. The relation for Chinese and Indian firms is significantly negative,while distinctively positive in the Russian sample.