The Binding Constraint on Firms'Growth in Developing Countries

42 Pages Posted: 20 Apr 2016

See all articles by Hinh T. Dinh

Hinh T. Dinh

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Dimitris Mavridis

Paris School of Economics (PSE); The World Bank

Hoa Nguyen

affiliation not provided to SSRN

Date Written: November 1, 2010

Abstract

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.

Keywords: Access to Finance, Environmental Economics & Policies, Microfinance, Debt Markets, Banks & Banking Reform

Suggested Citation

Dinh, Hinh T. and Mavridis, Dimitris and Nguyen, Hoa, The Binding Constraint on Firms'Growth in Developing Countries (November 1, 2010). World Bank Policy Research Working Paper No. 5485, Available at SSRN: https://ssrn.com/abstract=1714898

Dimitris Mavridis

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

The World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States
2024734750 (Phone)

Hoa Nguyen

affiliation not provided to SSRN

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