Abstract
AbstractIn developing countries, the credit market usually is underdeveloped. Low access to credit affects firms' production decisions and restrains them from optimizing inputs to achieve the maximum output. This article examines the link between credit constraints and capacity utilization and whether it varies across manufacturing subsectors. The sample consists of 4,790 private manufacturing firms in six Latin‐American countries. The endogenous switching model is applied to control for endogeneity between credit constraint conditions and capacity utilization and heterogeneity between credit‐constrained and credit‐unconstrained firms. The counterfactual analysis based on the estimation results suggests that constrained firms would have seen an increase of 26.8% capacity utilization had they not been constrained and unconstrained firms a decrease of 23.7% capacity utilization had they been constrained. Credit constraints generally affect medium‐high‐tech firms more severely than low‐tech firms. The counterfactual analysis further reveals that, for credit‐constrained high technology firms, depressed outputs are primarily related to labor productivity rather than capital productivity.
Highlights
Manufacturing-led development has proven to be a successful development strategy because of the manufacturing sector's direct contribution to economic growth, spillover effect, and dynamic productivity gains in terms of scale, tradability, and job creation (Felipe, Mehta, & Rhee, 2018; Hallward-Driemeier & Nayyar, 2017; Haraguchi, 2015)
We report average capacity utilization by industry sector for firms classified as either credit constrained or unconstrained (Table 2)
Highly efficient utilization of capital and low spare capacity raise depreciation rates and stimulate the updating of current facilities (Greenwood et al, 1988). This is important for developing countries where the manufacturing-led development strategies they have been pursuing depend largely on the updating processes in this sector
Summary
Manufacturing-led development has proven to be a successful development strategy because of the manufacturing sector's direct contribution to economic growth, spillover effect, and dynamic productivity gains in terms of scale, tradability, and job creation (Felipe, Mehta, & Rhee, 2018; Hallward-Driemeier & Nayyar, 2017; Haraguchi, 2015). The standardized stratified sampling methodology and the detailed quantitative and qualitative questions about firms' access to finance allow for better comparisons of the impact of credit constraints on capacity utilization across economic sectors in developing countries. We ask whether the observed capacity utilization ratios differ between constrained and unconstrained firms, for the whole sample and the subsectors In this region, 40.9% of the manufacturing firms are constrained by access to external credit. An optimized rate of capacity utilization reflects the availability of financial resources, among other resources Observable factors such as firm size and firm age may affect both the demand for credit and the actual output. For firms in the Latin-American region, the average actual output is 70.9% of the maximum output that firms would produce with all resources available
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