The Economic Geography of Late Industrialisation: Local Finance and the Cost of Distance in Imperial Russia

To what extent does the location of banks affect industrial development? New Economic Geography has generated key insights into the importance of geographical distance to markets or factor inputs in influencing the size of... [ view full abstract ]

To what extent does the location of banks affect industrial development? New Economic Geography has generated key insights into the importance of geographical distance to markets or factor inputs in influencing the size of manufacturing industries. We suggest that there similarly exists a geography of finance in industrializing countries.

Prior to the outbreak of World War I, the Russian Empire occupied 15% of the world’s land mass. Capital was scarce, and lending facilities were largely restricted to a few urban centers. We use a data set of industrial establishments in 1908 that allows us to map industrial activity at the enterprise level into third level sub-national units (volosts) for the European parts of the Empire. We combine this with a unique data set on the location and lending activity of branches of the Imperial Russian State Bank (Gosudarstvenniy Bank Rossii). We are thus able to determine the geographical distance of each enterprise to the nearest source of credit.

We use this data to show how the size, profitability, and capital intensity of manufacturing enterprises were influenced by the location of branches of the state-run banking system. We leverage the administrative criteria used by the Gosbank in establishing local branches to circumvent the endogeneity of credit supply to local economic conditions. The results show the degree to which geographical distance can be a factor determining the availability of external finance to firms.