Abstract
This study analyzes whether firm characteristics including firm size, firm age, availability of information, firm growth and industry significantly determine SMEs’ use of external financing or not and whether there are differences in the use of external financing between firms of different sizes and industries or not. Using firm level data from the World Bank Enterprise Survey, a fractional logit regression model was employed. The results indicate that firm size, availability of information and firm growth significantly determine the use of external financing, while firm age and industry are not important in determining the use of external financing. The results also indicate that there are significant differences in the use of external financing between small and medium firms, with small firms using less external financing compared to medium firms. The results suggest a need for interventions that take into account firm size example of such intervention is the special financing scheme that targets firms of different sizes. This may help those firms with difficulties to easily access external financing. The results also suggest a need for interventions that encourage SMEs to have proper financial information.
Highlights
Small and medium enterprises play an important role in providing employment, improving people’s livelihood and in the overall economy
We investigate this by testing whether the mean of external financing use between firms of different sizes and industries are statistically equivalent by using the Wald –F test
It is clear from the analysis that there are differences in the use of external financing by small, medium and large firms, indicating that size might be a determining factor in the use of external financing which may call for policies that take into account firm size, an example of such a policy is special financing scheme for firms of different sizes
Summary
Small and medium enterprises play an important role in providing employment, improving people’s livelihood and in the overall economy. In recognition of the role that SMEs play in the economy, the government of Malawi has made the development of SMEs a priority. The definition of enterprise size as stipulated in the Malawi SMEs policy is based on the number of employees and annual turnover. Micro enterprises are defined as firms with 1 to 4 employees and an annual turnover of USD $7143. Small enterprises are defined as firms with 5 to 20 employees and an annual turnover of USD $7143 to $71428. Medium enterprises are defined as firms with 21 to 100 employees and an annual turnover of $71428 to $357 142. Large enterprises are defined as firms with more than 100 employees and an annual turnover of more than $357142
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