(April 1997) It appears that firms grow faster and are more productive when more long-term finance is available to them. Government subsidies do not produce the same effects and are in some cases associated with reduced productivity and growth. Caprio and Demirgüç-Kunt review the literature on term finance to place the research in context and discuss its implications for World Bank operations. Their project investigated whether industrial firms in developing countries suffer from a shortage of long-term credit and whether that shortage affects the firm's investment, productivity, and growth. Both issues are important in designing the World Bank's industrial lending policy because the development community is reevaluating mechanisms to make more term finance available or to lessen the constraints imposed by its absence. Using both cross-country empirical analysis and country case studies, researchers found that developing country firms use significantly less long-term debt than their industrial country counterparts, even after controlling for firm characteristics. They explain the difference in debt composition of industrial and developing countries in terms of firm characteristics, macro factors, and - most important - government subsidies, the country's level of financial development, and legal and institutional factors. They conclude that more long-term finance tends to be associated with higher productivity. Cross-country analysis of firm-level data also indicates that when there is an active stock market and when creditors and debtors are better able to enter into long-term contracts, firms seem to be able to grow faster than they could by relying only on internal resources and short-term credit. Another important finding: Government subsidies around the world have increased firms' long-term indebtedness, but there is no evidence connecting these subsidies with the firms' ability to grow faster. Indeed, in some cases subsidies were associated with lower productivity. This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - summarizes the results of a recently completed Bank project on term finance. The study was funded by the Bank's Research Support Budget under the research project Term Finance: Theory and Evidence (RPO 679-62).