"The Reality of Short-term Shocks like the 'Credit Crunch' of 1997-1999 and the 'Financial Crisis' of 2007, and the Effectiveness of 'Emergency' Economic Measures - A Follow-up to Miwa [2008]" (in Japanese)

The Reality of Trade Credit and its Link to Bank Borrowing and Inventory: (1) Overall Discussion and Preliminary Investigation". This is the third of the 4 discussion papers that, together with the Introduction and Summary paper (Miwa, 2010c), comprise the report of my recent investigation: "A Study of Financing Behavior of Japanese Firms with Firm-Level Data from Corporate Enterprise Quarterly Statistics - 1994~2009". The findings in the first two discussion papers invite readers to consider "trade credit", and ask "what were the alternative sources of financing for the firms? Did they involve trade credit?" Some readers will recall that -- when criticized by the public and the government for not lending more extensively -- the banks had replied that good borrowers were not asking for money. Because of the strength of the conventional wisdom, most researchers and policy makers have focused on bank finance. They have neglected the place within the financial market for other sources of funds like trade credit. This paper first reviews the current state of discussions about trade credit (III-2). It then provides an overview of the relationship among trade partners and banks (III-3). It uses firm-level data on trade credit (payables and receivables) and other financial items like bank borrowings, deposit, and inventory. Finally, it compares positive-bank-borrowing firms and zero-bank-borrowing firms, and concludes that there is no clear and important difference between them. In turn, this suggests that whether a firm borrowed from banks had no bearing on whether it suffered from financial constraints.

Financing small and medium-size enterprises with factoring: global growth and its potential in eastern Europe

Factoring is a form of asset-based finance where the credit is extended based on the value of the borrower's accounts receivable. In recent years factoring has experienced phenomenal growth and has become an important source of financing-especially short-term working capital-for small and medium-size enterprises and corporations, reaching a worldwide volume of 760 billion euro in 2003. Although the importance of factoring varies considerably around the world, it occurs in most countries and is growing especially quickly in many developing countries. The authors explore the advantages of factoring over other types of lending for firms in developing economies, and discuss the informational, legal, tax, and regulatory barriers to its growth. They also examine the role of factoring in the eight Eastern European countries that became EU members on May 1, 2004-the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic, and Slovenia, referred to as the EU 8. The authors conclude that factoring offers key advantages over other lending products and is likely to become more important in these countries, and suggest policies to accelerate its development.Financial Intermediation,International Terrorism&Counterterrorism,Banking Law,Banks&Banking Reform,Payment Systems&Infrastructure,Banks&Banking Reform,Banking Law,Financial Intermediation,International Terrorism&Counterterrorism,Economic Theory&Research

A more complete conceptual framework for financing of small and medium enterprises

The authors propose a more complete conceptual framework for analysis of credit availability for small and medium enterprises (SMEs). In this framework, lending technologies are the key conduit through which government policies and national financial structures affect credit availability. They emphasize a causal chain from policy to financial structures which affect the feasibility and profitability of different lending technologies. These technologies, in turn, have important effects on SME credit availability. Financial structures include the presence of different financial institution types and the conditions under which they operate. Lending technologies include several transactions technologies, plus relationship lending. The authors argue that the framework implicit in most of the literature is oversimplified, neglects key elements of the chain, and often yields misleading conclusions. A common oversimplification is the treatment of transactions technologies as a homogeneous group, unsuitable for serving informationally opaque SMEs, and a frequent misleading conclusion is that large institutions are disadvantaged in lending to opaque SMEs.Banks&Banking Reform,Financial Intermediation,Investment and Investment Climate,Economic Theory&Research,Financial Crisis Management&Restructuring

Are Japanese Firms Becoming More Independent from Their Banks?: Evidence from the Firm-Level Data of the "Corporate Enterprise Quarterly Statistics," 1994-2009

The Ministry of Finance's "Corporate Enterprise Quarterly Statistics" (Hojin kigyo tokei kiho) is the only statistical source of well-balanced information about the financing behavior of Japanese firms. Indeed, there are few comparable sources available anywhere in the world. Using this firm-level data set from 1994 to 2009, I investigate the financing behavior of Japanese firms with over \10 million in paid-in capital. The conclusions contrast sharply with the conventional wisdom. Much of the research and policy discussions about Japanese finance begin from the premise that banks play a decisive role in firm behavior. This paper shows that firms have maintained a dependence on financial institutions well below the level that the conventional wisdom has claimed. Under the recent gzero-interest-rate, quantity easingh monetary policy, this gindependence of the firms from the banksh has increased further. This tendency is clearest among the smaller firms. In turn, this first conclusion raises doubts about the plausibility of the basic premise of research and policy debate on financial issues, and leads us to question whether observers may not have confused a gcrisis of financial institutionsh with a gfinancial crisish. Investigation into firm financing behavior under the gfinancial crisish from the end of 1997 to the beginning of 1999 does indeed suggest that it was a fiasco caused by the confusion of a gcrisis of financial institutionsh with a gfinancial crisish.

Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance

As innovative companies struggle to raise funds, intellectual property and intangible assets are providing alternative ways of financing innovation. But greater awareness of them as an asset class is needed. Raising that awareness is the focus of a new report from Athena Alliance, Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance by Ian Ellis, a former U.S. Department of Commerce official specializing in intellectual property and international trade. The report outlines increasing, but still nascent, means of financing innovation based on these assets in public, private and venture capital markets. As industry has invested capital in research and development to develop new technology and advance other creative activities, intellectual capital has become a valuable asset class, according to the paper. In response, firms specializing in intangible-based financing are springing up, using them to raise capital for the next round of innovation.The paper details equity, equity-debt, debt, and sale-leaseback transactions, both private and public, that have helped companies raise capital, based on careful, rigorous analysis and conservative underwriting standards. For example, the author notes that in 2000, there were two public deals using royalty securitization, raising $145 million. In 2007-08,$3.3 billion was raised in 19 deals.Unlike some of the exotic financial vehicles, however, the financial products discussed in this paper are some of the most basic financing mechanisms in business. The innovation is in recognizing the value of intangible assets for corporate finance. These new financial firms are using traditional financial techniques in new ways to help innovative companies.But more should be done.One important step would be developing sound, industry-wide, underwriting standards, according to the report. For example, Small Business Administration (SBA) rules permit its loans to be used for acquisition of intangible assets when buying on-going businesses. Rules are unclear on whether those assets can be used as collateral. The paper recommends that SBA work with commercial lenders to develop standards for using intangible assets as collateral.The report builds on earlier Athena Alliance papers, notably Intangible Asset Monetization: The Promise and the Reality