Credit‐Constrained in Risky Activities? The Determinants of the Capital Stocks of Micro and Small Firms in Western Africa

GIGA Research Programme Working Paper No. 185

47 Pages Posted: 31 Jan 2012 Last revised: 20 Jan 2015

Simon Lange

University of Goettingen (Gottingen)

Jann Lay

GIGA German Institute of Global and Area Studies; University of Goettingen

Michael Grimm

Erasmus University Rotterdam; University of Passau; IZA; DIW Berlin

Date Written: January 30, 2012

Abstract

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.

Keywords: Informal sector, micro and small enterprises, credit constraints, risk, risk aversion, firm growth, West‐Africa

JEL Classification: D13, D61, O12

Suggested Citation

Lange, Simon and Lay, Jann and Grimm, Michael, Credit‐Constrained in Risky Activities? The Determinants of the Capital Stocks of Micro and Small Firms in Western Africa (January 30, 2012). GIGA Research Programme Working Paper No. 185. Available at SSRN: https://ssrn.com/abstract=1995509 or http://dx.doi.org/10.2139/ssrn.1995509

Simon Lange

University of Goettingen (Gottingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

Jann Lay

GIGA German Institute of Global and Area Studies ( email )

Neuer Jungfernstieg 21
Hamburg, DE D-20354
Germany

University of Goettingen

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

Michael Grimm (Contact Author)

Erasmus University Rotterdam ( email )

Kortenaerkade 12
P.O. Box 29776
The Hague, 2502LT
Netherlands

HOME PAGE: http://www.iss.nl

University of Passau ( email )

Innstrasse 29
Passau, 94032
Germany

HOME PAGE: http://www.wiwi.uni-passau.de/grimm.html

IZA ( email )

P.O. Box 7240
Bonn, D-53072
Germany

DIW Berlin ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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