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Credit-constrained in risky activities? The determinants of capital stocks of micro and small firms in Western Africa

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  • Michael Grimm

    (International Institute of Social Studies, The Hague)

  • Simon Lange

    (Georg-August-University Göttingen)

  • Jann Lay

    (GIGA German Institute of Global and Area Studies, Hamburg)

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 capital stocks of MSEs remain low. This article analyzes the determinants of 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 for 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 adjust capital stocks downwards subsequently. As other firms simultaneously suffer from capital shortages, such behaviour may imply large inefficiencies.

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Bibliographic Info

Paper provided by Courant Research Centre PEG in its series Courant Research Centre: Poverty, Equity and Growth - Discussion Papers with number 104.

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Date of creation: 21 Dec 2011
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Handle: RePEc:got:gotcrc:104

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

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