Does the government credit guarantee promote micro, small, and medium enterprises? Evidence from Indonesia

To address the well-known credit rationing problem for the micro, small, and medium enterprises (MSMEs), this article studies the effects of government credit guarantees (GCGs) on the growth of MSMEs in Indonesia. This article utilizes the latest MSMEs survey data over the period 2010–2013 reported by the Indonesian Central Bureau of Statistics and applies the panel fixed effect regression model at both the industry aggregate and enterprise levels. The regression results reveal that GCGs are positively associated with the growth of MSMEs at the industry aggregate level, and such influence becomes stronger in the year following the loan receiving year. Among the different types of enterprises, GCGs are found to be positively and significantly associated with the value addition of the small and medium enterprises in comparison to the micro enterprises that have shown no relationship between GCGs and enterprise value added. Also, GCGs tend to provide significant benefits to the industries that have a higher dependency on external finance, and to the small enterprises, in particular. This article suggests that the GCGs can be considered as an alternative to collateral to unlock the desired level of finance to the small and medium enterprises. Also, it can be a powerful policy instrument to address the credit rationing and underinvestment problem recognized by Stiglitz and Weiss and Myers and Majluf in emerging economies.