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The Effect of Credit on Growth and Convergence of Firms in Kenyan Manufacturing

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  • Janvier D. Nkurunziza

Abstract

Although some recent studies have analysed issues relating to credit in African manufacturing, they have not directly tested for the effect of credit on firm growth. The use of bank credit can affect firm growth in two opposite ways. The effect may be positive if credit allows a firm to address its liquidity constraint and increase profitability. However, if macroeconomic shocks such as increases in interest rates make firm debts unsustainable as experienced in Kenya in the 1990s, indebted firms may shrink or even collapse. Hence, empirical testing is necessary to determine which effect dominates in a specific case. Using microeconomic data on the Kenyan manufacturing sector, the study finds that conditional on survival, the firms that use credit grow faster than those not using it. This result is robust to alternative estimation procedures, controlling for both endogeneity of the credit variable and selection bias. Convergence in firm size is significant in all the models except the GMM estimation that controls for several forms of endogeneity. The significance of convergence contradicts Gibrat.s law of proportionate effects while supporting Jovanovic.s learning hypothesis.

Suggested Citation

  • Janvier D. Nkurunziza, 2005. "The Effect of Credit on Growth and Convergence of Firms in Kenyan Manufacturing," CSAE Working Paper Series 2005-01, Centre for the Study of African Economies, University of Oxford.
  • Handle: RePEc:csa:wpaper:2005-01
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    References listed on IDEAS

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    1. Edwin Mansfield, 1995. "Innovation, Technology And The Economy," Books, Edward Elgar Publishing, volume 0, number 298.
    2. Fafchamps, Marcel, 2000. "Ethnicity and credit in African manufacturing," Journal of Development Economics, Elsevier, vol. 61(1), pages 205-235, February.
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    Cited by:

    1. Kung'U, Gabriel Kamau, 2011. "Factors influencing SMEs access to finance: A case study of Westland Division,Kenya," MPRA Paper 66633, University Library of Munich, Germany, revised 2014.
    2. Rosemary Atieno, 2009. "Linkages, Access to Finance and the Performance of Small-Scale Enterprises in Kenya," WIDER Working Paper Series RP2009-06, World Institute for Development Economic Research (UNU-WIDER).
    3. Gebregziabher, Kidanemariam & Hadush, Muuz & Gebremichae, Meaza, 2022. "How Long Micro and Small Enterprises Do Wait to Graduate? Empirical Evidence from Duration Analysis in Ethiopia," Journal of Economic Development, The Economic Research Institute, Chung-Ang University, vol. 47(2), pages 39-65, June.
    4. Essien, Ubon Asuquo & Arene, Chukwuemeka John, 2014. "An Analysis Of Access To Credit Markets And The Performance Of Small Scale Agro- Based Enterprises In The Niger Delta Region Of Nigeria," International Journal of Food and Agricultural Economics (IJFAEC), Alanya Alaaddin Keykubat University, Department of Economics and Finance, vol. 2(3), pages 1-16, July.

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