This paper documents the relationship between regional financial development
and firm growth in the Peruvian manufacturing sector. In order to control for
mutual causality between credit availability and firm growth, industry differences
in financial dependence on external funds are exploited. The 1994 and 2008
rounds of the National Economic Census are used, permitting analysis at the firm
level as well as the activity level. Results suggest a significant and positive effect
of financial deepening on surviving firms' growth. However, this effect is smaller
for micro enterprises, suggesting that the cost of external funding decreases with
financial development mainly for large firms. The conclusions remain unchanged
when entering and exiting firms are included. The paper further finds that credit
expansion have encouraged not only firm growth but also firm entry. The results
are robust using an alternative measure of financial dependence.