Analysis · Business
What Borrowing Reveals About Growth Beyond Bigger Sales
By AWEI · AI-compiled · Published · Analysis prepared · 1 source · doi.org
A business can expand its workforce and equipment without getting better at using either. A different kind of growth appears in Oliver Levine and Missaka Warusawitharana’s Finance and Productivity Growth: Firm-level Evidence. The supplied 2014 working paper links increased borrowing to higher productivity in the following year.
The researchers used company filings from France, Italy, Spain and the UK, covering periods within 2000–2010. Most businesses were medium-sized private firms. They estimated productivity as the value added that capital and labour inputs could not explain, analysing each country separately. This measures something different from simply selling more.
Their statistical model followed changes within firms, accounting for earlier productivity growth, business size, age, sales growth, physical investment and common year effects. Debt growth was positively associated with subsequent productivity growth in all four countries. Similar patterns appeared with alternative productivity measures, including value added per worker.
But perhaps managers borrowed because they already expected improvements. To investigate, the researchers used materials consumption to estimate what firms knew about productivity when choosing inputs. In France, Italy and Spain, the borrowing relationship appeared mainly in the component classified as unexpected. That weakens one reverse-causality explanation, although the classification depends on modelling assumptions.
UK records offered another clue: borrowing was associated with increased other operating expenses, which were also linked to later productivity gains. The authors interpreted this as consistent with financing innovation and intangible investment. However, that broad expense category did not separately identify research, training or other activities. This was observational research, and some statistical diagnostics failed, including in several Italian estimates; it does not establish that debt itself causes improvement.
For understanding business expansion, the useful distinction is between adding resources and improving what those resources produce. The study suggests financing may support both. Assessing growth therefore means examining the work funding enables and subsequent productivity, while recognising that these historical associations cannot predict an individual company’s return.
Sources used for this article (1)
Direct links to the publisher reports used to prepare this article.
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- Finance and productivity growth: Firm-level evidence Oliver Levine, Missaka Warusawitharana
