IDEAS home Printed from https://ideas.repec.org/p/got/gotcrc/104.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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.

Suggested Citation

  • Michael Grimm & Simon Lange & Jann Lay, 2011. "Credit-constrained in risky activities? The determinants of capital stocks of micro and small firms in Western Africa," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 104, Courant Research Centre PEG.
  • Handle: RePEc:got:gotcrc:104
    as

    Download full text from publisher

    File URL: http://www2.vwl.wiso.uni-goettingen.de/courant-papers/CRC-PEG_DP_104.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Guariglia, Alessandra & Liu, Xiaoxuan & Song, Lina, 2011. "Internal finance and growth: Microeconometric evidence on Chinese firms," Journal of Development Economics, Elsevier, vol. 96(1), pages 79-94, September.
    2. David McKenzie & Christopher Woodruff, 2008. "Experimental Evidence on Returns to Capital and Access to Finance in Mexico," World Bank Economic Review, World Bank Group, vol. 22(3), pages 457-482, November.
    3. Pablo Fajnzylber & William Maloney & Gabriel Montes Rojas, 2006. "Microenterprise Dynamics in Developing Countries: How Similar are They to Those in the Industrialized World? Evidence from Mexico," World Bank Economic Review, World Bank Group, vol. 20(3), pages 389-419.
    4. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-827, August.
    5. Marcel Fafchamps & David McKenzie & Simon Quinn & Christopher Woodruff, 2011. "When is capital enough to get female microenterprises growing? Evidence from a randomized experiment in Ghana," CSAE Working Paper Series 2011-11, Centre for the Study of African Economies, University of Oxford.
    6. Binks, Martin R & Ennew, Christine T, 1996. "Growing Firms and the Credit Constraint," Small Business Economics, Springer, vol. 8(1), pages 17-25, February.
    7. Xu, Bin, 1998. "A reestimation of the Evans-Jovanovic entrepreneurial choice model," Economics Letters, Elsevier, vol. 58(1), pages 91-95, January.
    8. McKenzie, David J & Woodruff, Christopher, 2006. "Do Entry Costs Provide an Empirical Basis for Poverty Traps? Evidence from Mexican Microenterprises," Economic Development and Cultural Change, University of Chicago Press, vol. 55(1), pages 3-42, October.
    9. Abhijit Banerjee & Kaivan Munshi, 2004. "How Efficiently is Capital Allocated? Evidence from the Knitted Garment Industry in Tirupur," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 19-42.
    10. Domenico Sarno, 2005. "Liquidity Constraint on the Production of Firms in Southern Italy," Small Business Economics, Springer, vol. 25(2), pages 133-146, September.
    11. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
    12. Luís M B Cabral & José Mata, 2003. "On the Evolution of the Firm Size Distribution: Facts and Theory," American Economic Review, American Economic Association, vol. 93(4), pages 1075-1090, September.
    13. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
    14. Christopher Udry & Santosh Anagol, 2006. "The Return to Capital in Ghana," American Economic Review, American Economic Association, vol. 96(2), pages 388-393, May.
    15. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    16. Tomomi Tanaka & Colin F. Camerer & Quang Nguyen, 2010. "Risk and Time Preferences: Linking Experimental and Household Survey Data from Vietnam," American Economic Review, American Economic Association, vol. 100(1), pages 557-571, March.
    17. Arne Bigsten & Paul Collier & Stefan Dercon & Marcel Fafchamps & Bernard Gauthier & Jan Willem Gunning & Abena Oduro & Remco Oostendorp & Cathy Patillo & Måns S–derbom & Francis Teal & Albert Zeufack, 2003. "Credit Constraints in Manufacturing Enterprises in Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 12(1), pages 104-125, March.
    18. John Hutchinson & Ana Xavier, 2006. "Comparing the Impact of Credit Constraints on the Growth of SMEs in a Transition Country with an Established Market Economy," Small Business Economics, Springer, vol. 27(2), pages 169-179, October.
    19. Mahmud Yesuf & Randall A. Bluffstone, 2009. "Poverty, Risk Aversion, and Path Dependence in Low-Income Countries: Experimental Evidence from Ethiopia," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(4), pages 1022-1037.
    20. Mead, Donald C. & Liedholm, Carl, 1998. "The dynamics of micro and small enterprises in developing countries," World Development, Elsevier, vol. 26(1), pages 61-74, January.
    21. Robert E. Carpenter & Bruce C. Petersen, 2002. "Is The Growth Of Small Firms Constrained By Internal Finance?," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 298-309, May.
    22. Cunningham, Wendy V & Maloney, William F, 2001. "Heterogeneity among Mexico's Microenterprises: An Application of Factor and Cluster Analysis," Economic Development and Cultural Change, University of Chicago Press, vol. 50(1), pages 131-156, October.
    23. Bigsten, Arne, et al, 2000. "Rates of Return on Physical and Human Capital in Africa's Manufacturing Sector," Economic Development and Cultural Change, University of Chicago Press, vol. 48(4), pages 801-827, July.
    24. Fafchamps, Marcel & Pender, John, 1997. "Precautionary Saving, Credit Constraints, and Irreversible Investment: Theory and Evidence from Semiarid India," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(2), pages 180-194, April.
    25. Wim Naudé, 2010. "Entrepreneurship, developing countries, and development economics: new approaches and insights," Small Business Economics, Springer, vol. 34(1), pages 1-12, January.
    26. Eswaran, Mukesh & Kotwal, Ashok, 1990. "Implications of Credit Constraints for Risk Behaviour in Less Developed Economies," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 473-482, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    JEL classification:

    • D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:got:gotcrc:104. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dominik Noe). General contact details of provider: http://www.uni-goettingen.de/en/82144.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.