Resource Misallocation and Financial Access Constraints: Evidence from Developing Countries

This paper examines the extent of resource misallocation among firms with varying financial constraints using data from 15,797 manufacturing firms across 57 countries from the World Bank’s Enterprise Survey. Results show that constrained firms exhibit higher distortions, particularly capital distortions, leading to greater misallocation. Removing these distortions leads to a three-fold increase in total factor productivity (TFP), with the largest gains in Sub-Saharan Africa, East Asia & the Pacific regions. Constrained firms account for about 9% of these TFP gains, and higher distortions among these firms are negatively correlated with economic development, measured by GDP per capita. The findings highlight the importance of targeted finance policies linking access to firm productivity to reduce inefficiencies and enhance aggregate productivity, especially in developing countries.