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

By Meghana Ayyagari, Asli Demirgüç-Kunt, Vojislav Maksimovic. 2008

677 citations recorded by the source corpus.

What role does the business environment play in promoting or 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 all discussed without any comparative evidence on their ordering. Using firm-level survey data on the relative importance of different features of the business environment, the article finds 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. Analyses using directed acyclic graph methodology and regressions find that only obstacles related to finance, crime, and policy instability directly affect firm growth. The finance result is shown to be the most robust. The results have important implications for the priority of reforms. Maintaining policy 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.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/786bca4131451bbc8bbcdb3e56335695b0a80e81

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Citations in the corpus

Small and medium-size enterprises: Access to finance as a growth constraint (2006, background): “Using firm level survey data on the business environment across 80 countries, Ayyagari et al. (2005) investigate the impact of access to finance, property right protection, provision of infrastructure, inefficient regulation and taxation, and broader governance features such as corruption,…”
Finance-Growth Nexus and Dual-Banking Systems: Relative Importance of Islamic Banks (2016, background): “The lack of access to finance can exacerbate poverty (Ayyagari et al, 2008).”
Financial Constraints and Small and Medium Enterprises: A Review* (2020, background): “With international evidence from OECD countries, lack of access to external finance has been shown to be the most direct and robust determinant of firm dynamism amongst SMEs (Pissarides, 1999; Beck and Demirguc-Kunt, 2006; Zehir et al., 2006; Ayyagari et al., 2008; Bridges and Guariglia, 2008; Gill ”
A conceptual framework for identifying financing preferences of SMEs (2015, background): “…the economic activity of a country, the difficulty in accessing finance slows down their growth and development (Beck, 2007; Beck & Demirguc-Kunt, 2006; Klonowski, 2012; Petersen & Rajan, 2002; Wagenvoort, 2003; Woldie, Mwitta, & Saidimu, 2012; Ayyagari et al., 2008; Wu, Song, & Zeng, 2008).”
Firm Innovation in Emerging Markets: The Role of Finance, Governance, and Competition (2011, background): “…(e.g., Acemoglu and Johnson (2005)), investment climate and business environment obstacles to growth (e.g., Beck, Demirgüç-Kunt, and Levine (2005), Ayyagari, Demirgüç-Kunt, and Maksimovic (2008)), firm financing patterns (e.g., Beck, Demirgüç-Kunt, and Maksimovic (2008), Cull and Xu (2005),…”
Small vs. Young Firms Across the World: Contribution to Employment, Job Creation, and Growth (2011, positive): “…questions in developmental economics including the relation between property rights and contracting institutions (e.g. Acemoglu and Johnson, 2005; Ayyagari, Demirguc-Kunt, and Maksimovic, 2008a), investment climate and business environment obstacles to growth (e.g. Beck, Demirguc-Kunt, and…”
TFP estimation at firm level: The fiscal aspect of productivity convergence in the UK (2017, background): “In that sense, individual firms may blame the high tax burden for their lower rates of ln itTFP∆ but it is less likely that all firms in the industry will engage in such blame shifting (Ayyagari et al., 2008).”
Drivers of Entrepreneurship and Post-Entry Performance of Newborn Firms in Developing Countries (2014, neutral): “In contrast, new small firms in DCs are credit and equity rationed in the vast majority of cases because their financial markets are underdeveloped (Ayyagari, Demirgüç-Kunt, and Maksimovic 2008; Lian, Sepehri, and Foley 2011; and below).”