IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

The Effect of Credit on Growth and Convergence of Firms in Kenyan Manufacturing

  • Janvier D. Nkurunziza
Registered author(s):

    Although some recent studies have analysed issues relating to credit in African manufacturing, they have not directly tested for the effect of credit on firm growth. The use of bank credit can affect firm growth in two opposite ways. The effect may be positive if credit allows a firm to address its liquidity constraint and increase profitability. However, if macroeconomic shocks such as increases in interest rates make firm debts unsustainable as experienced in Kenya in the 1990s, indebted firms may shrink or even collapse. Hence, empirical testing is necessary to determine which effect dominates in a specific case. Using microeconomic data on the Kenyan manufacturing sector, the study finds that conditional on survival, the firms that use credit grow faster than those not using it. This result is robust to alternative estimation procedures, controlling for both endogeneity of the credit variable and selection bias. Convergence in firm size is significant in all the models except the GMM estimation that controls for several forms of endogeneity. The significance of convergence contradicts Gibrat`s law of proportionate effects while supporting Jovanovic`s learning hypothesis.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number WPS/2005-01.

    in new window

    Date of creation: 01 Jan 2005
    Date of revision:
    Handle: RePEc:oxf:wpaper:wps/2005-01
    Contact details of provider: Postal:
    Manor Rd. Building, Oxford, OX1 3UQ

    Web page:

    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Gauthier, Bernard & Gersovitz, Mark, 1997. "Revenue erosion through exemption and evasion in Cameroon, 1993," Journal of Public Economics, Elsevier, vol. 64(3), pages 407-424, June.
    2. Paul Collier & Jan Willem Gunning, 1998. "Explaining African economic performance," Economics Series Working Papers WPS/1997-02.2, University of Oxford, Department of Economics.
    3. John McMillan & Christopher Woodruff, 1998. "Interfirm Relationships and Informal Credit in Vietnam," William Davidson Institute Working Papers Series 132, William Davidson Institute at the University of Michigan.
    4. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
    5. Geroski, P. A., 1995. "What do we know about entry?," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 421-440, December.
    6. Robert G. King & Sergio T. Rebelo, 1989. "Transitional Dynamics and Economic Growth in the Neoclassical Model," NBER Working Papers 3185, National Bureau of Economic Research, Inc.
    7. Arne Bigsten & Paul Collier & Stefan Dercon & Marcel Fafchamps & Bernard Gauthier & Jan Willem Gunning & Måns Söderbom & Abena Oduro & Remco Oostendorp & Catherine Pattillo & Francis Teal & Albert Zeu, 2000. "Credit constraints in manufacturing enterprises in Africa," CSAE Working Paper Series 2000-24, Centre for the Study of African Economies, University of Oxford.
    8. Francis Teal, 1999. "The Ghanaian manufacturing sector 1991-95: Firm growth, productivity and convergence," Journal of Development Studies, Taylor & Francis Journals, vol. 36(1), pages 109-127.
    9. Marcel Fafchamps & Jan Willem Gunning and Remco Oostendorp, 1999. "Inventories and risk in African manufacturing," Economics Series Working Papers WPS/1999-19, University of Oxford, Department of Economics.
    10. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
    11. Paul Collier & Marcel Fafchamps & Francis Teal & Stefan Dercon, 1999. "Contract flexibility and dispute resolution in African manufacturing," Economics Series Working Papers WPS/1999-20, University of Oxford, Department of Economics.
    12. Agarwal, Rajshree & Audretsch, David B., 1999. "The two views of small firms in industry dynamics: a reconciliation," Economics Letters, Elsevier, vol. 62(2), pages 245-251, February.
    13. Arne Bigsten & Paul Collier & Stefan Dercon & Marcel Fafcharnps & Bernard Gauthier & Jan Willern Gunning & Jean Habarurema & Anders Isaksson & Abena Oduro & Remco Oostendorp & Cathy Pattillo & Mans So, 1999. "Exports of African manufactures: macro policy and firm behaviour," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 8(1), pages 53-71.
    14. William Easterly & Ross Levine, 1997. "Africa's Growth Tragedy: Policies and Ethnic Divisions," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1203-1250.
    15. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
    16. McPherson, Michael A., 1996. "Growth of micro and small enterprises in southern Africa," Journal of Development Economics, Elsevier, vol. 48(2), pages 253-277, March.
    17. Fafchamps, Marcel, 2000. "Ethnicity and credit in African manufacturing," Journal of Development Economics, Elsevier, vol. 61(1), pages 205-235, February.
    18. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    19. Jean Paul Azam & Bruno Biais & Magueye Dia & Christine Maurel, 2001. "Informal and Formal Credit Markets and Credit Rationing in Côte D'Ivoire," Oxford Review of Economic Policy, Oxford University Press, vol. 17(4), pages 520-534.
    20. Sleuwaegen, Leo & Goedhuys, Micheline, 2002. "Growth of firms in developing countries, evidence from Cote d'Ivoire," Journal of Development Economics, Elsevier, vol. 68(1), pages 117-135, June.
    21. Evans, David S., 1986. "Tests of Alternative Theories of Firm Growth," Working Papers 86-36, C.V. Starr Center for Applied Economics, New York University.
    22. Robert J. Barro, 1989. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
    23. Francis Teal & Alan Harding & Måns Söderbom, 2004. "Survival and Success among African Manufacturing Firms," Economics Series Working Papers WPS/2004-05, University of Oxford, Department of Economics.
    24. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc.
    25. Hall, Bronwyn H, 1987. "The Relationship between Firm Size and Firm Growth in the U.S. Manufacturing Sector," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 583-606, June.
    26. Raturi, Mayank & Swamy, Anand V, 1999. "Explaining Ethnic Differentials in Credit Market Outcomes in Zimbabwe," Economic Development and Cultural Change, University of Chicago Press, vol. 47(3), pages 585-604, April.
    27. Fafchamps, Marcel, 1997. "Trade credit in Zimbabwean manufacturing," World Development, Elsevier, vol. 25(5), pages 795-815, May.
    28. Dwight M. Jaffee & Thomas Russell, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 651-666.
    29. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    30. 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.
    31. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
    32. Mead, Donald C., 1994. "The contribution of small enterprises to employment growth in southern and eastern Africa," World Development, Elsevier, vol. 22(12), pages 1881-1894, December.
    33. Robert J. Barro & Xavier Sala-i-Martin, 1990. "Economic Growth and Convergence across The United States," NBER Working Papers 3419, National Bureau of Economic Research, Inc.
    34. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    35. Fafchamps, Marcel, 1996. "The enforcement of commercial contracts in Ghana," World Development, Elsevier, vol. 24(3), pages 427-448, March.
    36. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
    37. Aryeetey, Ernest & Senbet, Lemma W & Udry, Christopher, 1997. "Financial Liberalisation and Financial Markets in Sub-Saharan Africa: A Synthesis," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 6(1), pages 1-28, March.
    38. Alan Harding & Måns Söderbom & Francis Teal, 2004. "Survival and Success among African Manufacturing Firms," Development and Comp Systems 0409046, EconWPA.
    39. S. Illeris & G. Akehurst, 2002. "Introduction," The Service Industries Journal, Taylor & Francis Journals, vol. 22(1), pages 1-3, January.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:oxf:wpaper:wps/2005-01. 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: (Monica Birds)

    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 references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link 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 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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.