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

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Author Info

  • Prof. Dr. Michael Grimm

    ()
    (International Institute of Social Studies of Erasmus University Rotterdam)

  • Simon Lange

    ()
    (University of Göttingen)

  • Jun-Prof. Dr. Jann Lay

    ()
    (GIGA Institute of Latin American Studies)

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 behaviour may imply large inefficiencies.

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Bibliographic Info

Paper provided by GIGA German Institute of Global and Area Studies in its series GIGA Working Paper Series with number 185.

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Length: 47 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:gig:wpaper:185

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

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  1. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0284, National Bureau of Economic Research, Inc.
  2. John Hutchinson & Ana Xavier, 2004. "Comparing the Impact of Credit Constraints on the Growth of SMEs in a Transition Country with an Established Market Economy," LICOS Discussion Papers, LICOS - Centre for Institutions and Economic Performance, KU Leuven 15004, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  3. Alessandra Guariglia & Xiaoxuan Liu & Lina Song, . "Internal Finance and Growth: Microeconometric Evidence on Chinese Firms," Discussion Papers, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM) 09/11, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
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