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http://ssrn.com/abstract=844565
 
 

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How Important are Financing Constraints? The Role of Finance in the Business Environment


Vojislav Maksimovic


University of Maryland - Robert H. Smith School of Business

Asli Demirgüç-Kunt


World Bank - Financial and Private Sector Development; World Bank

Meghana Ayyagari


George Washington University - School of Business

January 2006

World Bank Policy Research Working Paper No. 3820

Abstract:     
What role does the business environment play in promoting and restraining firm growth? Recent literature points to a number of factors as obstacles to growth. Inefficient functioning of financial markets, inadequate security and enforcement of property rights, poor provision of infrastructure, inefficient regulation and taxation, and broader governance features such as corruption and macroeconomic stability are discussed without any comparative evidence on their ordering. In this paper, the authors use firm level survey data to present evidence on the relative importance of different features of the business environment. They find that although firms report many obstacles to growth, not all the obstacles are equally constraining. Some affect firm growth only indirectly through their influence on other obstacles, or not at all. Using Directed Acyclic Graph methodology as well as regressions, the authors find that only obstacles related to finance, crime, and political instability directly affect the growth rate of firms. Robustness tests further show that the finance result is the most robust of the three. These results have important policy implications for the priority of reform efforts. They show that maintaining political stability, keeping crime under control, and undertaking financial sector reforms to relax financing constraints are likely to be the most effective routes to promote firm growth.

Number of Pages in PDF File: 59

Keywords: Pro-Poor Growth and Inequality Inequality Economic Conditions and Volatility Private Participation in Infrastructure Economic Growth

JEL Classification: D21, G30, O12

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Date posted: November 14, 2005  

Suggested Citation

Maksimovic, Vojislav and Demirgüç-Kunt, Asli and Ayyagari, Meghana, How Important are Financing Constraints? The Role of Finance in the Business Environment (January 2006). World Bank Policy Research Working Paper No. 3820. Available at SSRN: http://ssrn.com/abstract=844565

Contact Information

Vojislav Maksimovic (Contact Author)
University of Maryland - Robert H. Smith School of Business ( email )
Van Munching Hall
College Park, MD 20742-1815
United States
301-405-2125 (Phone)
301-314-9157 (Fax)
HOME PAGE: http://www.rhsmith.umd.edu/finance/vmax/
Asli Demirgüç-Kunt
World Bank - Financial and Private Sector Development ( email )
United States
202-473-7479 (Phone)
202-522-1155 (Fax)
HOME PAGE: http://econ.worldbank.org/staff/ademirguckunt/
World Bank ( email )
1818 H Street, NW
Washington, DC 20433
United States
Meghana Ayyagari
George Washington University - School of Business ( email )
Washington, DC 20052
United States
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