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

59 Pages Posted: 14 Nov 2005  

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business

Asli Demirgüç-Kunt

World Bank - Development Research Group; World Bank

Meghana Ayyagari

George Washington University - School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: January 2006

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.

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

JEL Classification: D21, G30, O12

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: https://ssrn.com/abstract=844565

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 - Development Research Group ( 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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