Supporting small firms through recessions and recoveries

Small firms often struggle in getting access to credit. This is especially true during recessions, when banks tighten credit supply. To overcome this, governments around the world have implemented different programs to help small firms. Despite the widespread implementation of these programs, evidence on their effectiveness is mixed and often challenged by difficulties in pinpointing the causal effects of the programs. For example, these programs are usually available to all small firms, who decide whether or not to enter the program. If only the managers with better skills and/or with better information apply, it is not possible to precisely estimate the effects of the program, as these firms would most likely perform better than their peers anyway.

This paper overcomes such difficulties by using variation in access to the PME Líder certification. This program was created by IAPMEI in 2008, with the goal of ensuring that the best performing SMEs had access to financing during the global financial crisis. As such, the program is not open to all small firms, but only to those that meet a list of eligibility criteria. Firms that meet these criteria can have access to partial government loan guarantees and a credit quality certification.

The design of the program helps deal with the challenges usually faced by researchers. Instead of comparing firms that obtained the PME Líder certification with others (which would have the selection problems already discussed), we compare firms that barely meet the eligibility criteria, with those that were very close to do so. Formally, we estimate the intention-to-treat effects of the program by using a multidimensional regression discontinuity design.

We find that eligible firms borrow more and at lower rates than non-eligible firms, allowing them to increase investment and employment during crises. However, when the economy is recovering the effects of the program are less pronounced. These results show that government support during recessions can successfully help firms to continue to invest, though supporting them through recoveries seems to bring fewer tangible benefits.

Click here to go to the paper by Diana Bonfim, Cláudia Custódio, and Clara Raposo.