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Start-up Capital, Microenterprises and Technical Efficiency in Mexico

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  • Fausto Hernández-Trillo
  • José A. Pagán
  • Julia Paxton

Abstract

Access to adequate start-up capital has been identified as an important deterrent to microenteprise development and growth. Using firm level data from Mexico's National Survey of Microenterprises, we estimate a stochastic frontier production function with inefficiency effects related to the main sources of start-up capital. Microenterprises utilizing bank loans, carryover business capital, moneylenders and credit from clients and suppliers are more technically efficient than those relying on family, friends and on own financial sources. Bank loans led to the highest degree of technical efficiency, indicating a well-functioning screening process despite information asymmetries. Banks tend to offer the largest average loan size with the longest terms which are significant factors in allowing microentrepreneurs to overcome financing constraints. Copyright Blackwell Publishing Ltd 2005.

Suggested Citation

  • Fausto Hernández-Trillo & José A. Pagán & Julia Paxton, 2005. "Start-up Capital, Microenterprises and Technical Efficiency in Mexico," Review of Development Economics, Wiley Blackwell, vol. 9(3), pages 434-447, August.
  • Handle: RePEc:bla:rdevec:v:9:y:2005:i:3:p:434-447
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    References listed on IDEAS

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    1. Reinhart, Carmen M. & Vegh, Carlos A., 1995. "Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination," Journal of Development Economics, Elsevier, pages 357-378.
    2. Allan Drazen & Elhanan Helpman, 1987. "Stabilization with Exchange Rate Management under Uncertainty," NBER Working Papers 2268, National Bureau of Economic Research, Inc.
    3. Reinhart, Carmen M. & Vegh, Carlos A., 1995. "Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination," Journal of Development Economics, Elsevier, pages 357-378.
    4. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    5. Allan Drazen & Elhanan Helpman, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 835-855.
    6. Michael Mussa, 2002. "Argentina and the Fund: From Triumph to Tragedy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa67, January.
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    Cited by:

    1. Beck, Thorsten & Lu, Liping & Yang, Rudai, 2015. "Finance and Growth for Microenterprises: Evidence from Rural China," World Development, Elsevier, vol. 67(C), pages 38-56.
    2. Shahidur R. Khandker & Hussain A. Samad & Rubaba Ali, 2013. "Does Access to Finance Matter in Microenterprise Growth? Evidence from Bangladesh," Working Papers 15, Institute of Microfinance (InM).
    3. Antonio Báez-Morales, 2015. "“Differences in efficiency between Formal and Informal Micro Firms in Mexico”," IREA Working Papers 201516, University of Barcelona, Research Institute of Applied Economics, revised Jun 2015.
    4. Merima Ali & Jack Peerlings & Xiaobo Zhang, 2014. "Clustering as an organizational response to capital market inefficiency: evidence from microenterprises in Ethiopia," Small Business Economics, Springer, pages 697-709.
    5. Huang, Zuhui & Zhang, Xiaobo & Zhu, Yunwei, 2008. "The role of clustering in rural industrialization: A case study of the footwear industry in Wenzhou," China Economic Review, Elsevier, pages 409-420.
    6. Raccanello, Kristiano, 2016. "Do Microenterprises’ size and status matter to access informal finance?./ ¿El tamaño y el registro de las microempresas permite el acceso a los mercados financieros informales?," Panorama Económico, Escuela Superior de Economía, Instituto Politécnico Nacional, pages 123-152.
    7. López-Martín Bernabé, 2016. "Informal Sector Misallocation," Working Papers 2016-09, Banco de México.
    8. Khandker, Shahidur R. & Samad, Hussain & Ali, Rubaba, 2013. "Does Access to Finance Matter in Microenterprise Growth? Evidence from Bangladesh," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149028, Agricultural and Applied Economics Association.
    9. Nichter, Simeon & Goldmark, Lara, 2009. "Small Firm Growth in Developing Countries," World Development, Elsevier, vol. 37(9), pages 1453-1464, September.
    10. Rajesh Natarajan & Malathy Duraisamy, 2008. "Efficiency and productivity in the Indian unorganized manufacturing sector: did reforms matter?," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), pages 373-399.
    11. Jeffrey Nugent & Grigor Sukiassyan, 2009. "Small Firms and Formality: The Influence of Judicial Efficiency and Regulation Costs," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 34(4), pages 349-371, June.

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