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 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.

Bibliographic Details

Main Authors:	Mavridis, Dimitris A., Dinh, Hinh T., Nguyen, Hoa B.
Language:	English
Published:	2010-11-01
Subjects:	ACCESS TO FINANCE, APPLICATION PROCEDURES, BANK LOANS, BIASES, BINDING CONSTRAINT, BUSINESS ENVIRONMENT, BUSINESS OWNERS, CAPITAL CONSTRAINTS, CAPITAL MARKETS, COLLATERAL, COLLATERAL REQUIREMENTS, COMPETITORS, CORRUPTION, CREDIT CONSTRAINT, CREDIT INCREASES, CREDIT REPORTING, CREDITOR, DEBT, DEVELOPING COUNTRIES, DEVELOPMENT BANK, DUMMY VARIABLE, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, EMPLOYMENT, EMPLOYMENT GROWTH, ENTREPRENEURS, EXPORTER, EXPORTERS, EXTERNAL FINANCE, EXTERNAL FUNDS, FINANCE ACCESS, FINANCIAL ACCESS, FINANCIAL DEVELOPMENT, FINANCIAL INSTITUTION, FINANCIAL INSTITUTIONS, FINANCIAL MARKETS, FINANCIAL SECTOR DEVELOPMENT, FINANCIAL SECTOR REFORMS, FINANCIAL SERVICES, FINANCIAL SYSTEM, FINANCIAL SYSTEMS, FINANCING OBSTACLES, FIRM PERFORMANCE, FIRM SIZE, FIRM SIZES, FIRMS, FIXED ASSETS, FOREIGN INVESTMENT, GOVERNMENT OWNERSHIP, GREATER ACCESS, HUMAN RESOURCES, INSTITUTIONAL DEVELOPMENT, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL TRADE, INVESTMENT CLIMATE, INVESTMENT FINANCE, INVESTMENT FUNDS, ISSUANCES, JOB CREATION, LABOR FORCE, LACK OF ACCESS, LEGAL CONSTRAINTS, LEGAL ENVIRONMENT, LICENSING, LINE OF CREDIT, LINES OF CREDIT, LOAN, MANUFACTURING ENTERPRISE, MATURITY, MONEYLENDERS, NONBANK FINANCIAL INSTITUTIONS, OVERDRAFT, OVERDRAFT FACILITY, OWNERSHIP STRUCTURE, POLITICAL ECONOMY, PRODUCTIVE INVESTMENTS, PRODUCTIVITY, PROPERTY RIGHTS, PUBLIC BANKS, RED TAPE, SALES GROWTH, SHARE OF INVESTMENT, SMALL FIRMS, SUPPLIERS, TAX, TAX ADMINISTRATION, TAX RATES, TAXATION, TRANSPORT,
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 https://hdl.handle.net/10986/3966
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