Credit‐Constrained in Risky Activities? The Determinants of the Capital Stocks of Micro and Small Firms in Western Africa
University of Goettingen (Gottingen)
GIGA German Institute of Global and Area Studies; University of Goettingen
Erasmus University Rotterdam; University of Passau; IZA; DIW Berlin
January 30, 2012
GIGA Research Programme Working Paper No. 185
Micro and small enterprises (MSEs) in developing countries are typically considered to be severely credit constrained. Additionally, high business risks may partly explain why the capital stocks of MSEs remain low. This article analyzes the determinants of the capital stocks of MSEs in poor economies focusing on credit constraints and risk. The analysis is based on a unique, albeit cross-sectional but backward‐looking, micro data set on MSEs covering the economic capitals of seven West‐African countries. The main result is that capital market imperfections indeed seem to explain an important part of the variation in capital stocks in the early lifetime of MSEs. Furthermore, the analyses show that risk plays a key role in capital accumulation. Risk-averse individuals seem to adjust their initially low capital stocks upwards when enterprises grow older. MSEs in risky activities owned by wealthy individuals even seem to over-invest when they start their business and subsequently adjust capital stocks downwards. As other firms simultaneously suffer from capital shortages, such behavior may imply large inefficiencies.
Number of Pages in PDF File: 47
Keywords: Informal sector, micro and small enterprises, credit constraints, risk, risk aversion, firm growth, West‐Africa
JEL Classification: D13, D61, O12
Date posted: January 31, 2012 ; Last revised: January 20, 2015
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