The Binding Constraint on Firms’ Growth in Developing Countries
Firms in developing countries face numerous and serious constraints on their growth, ranging from corruption to lack of infrastructure to inability to access finance. Countries lack the resources to remove all the constraints at once and so would b...
| Main Authors: | , , |
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| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20101124114607 http://hdl.handle.net/10986/3966 |
| Summary: | Firms in developing countries face
numerous and serious constraints on their growth, ranging
from corruption to lack of infrastructure to inability to
access finance. Countries lack the resources to remove all
the constraints at once and so would be better off removing
the most binding one first. This paper uses data from World
Bank Enterprise Surveys in 2006-10 to identify the most
binding constraints on firm operations in developing
countries. While each country faces a different set of
constraints, these constraints also vary by firm
characteristics, especially firm size. Across all countries,
access to finance is among the most binding constraints;
other obstacles appear to matter much less. This result is
robust for all regions. Smaller firms must rely more on
their own funds to invest and would grow significantly
faster if they had greater access to external funds. As a
result, a low level of financial development skews the firm
size distribution by increasing the relative share of small
firms. The results suggest that financing constraints play a
significant part in explaining the "missing
middle" -- the failure of small firms in developing
countries to grow into medium-size or large firms. |
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