Abstract
This paper draws on data from Uganda’s 2013 World Bank Enterprise Survey (WBES), which comprises data on 762 firms across Uganda to assess the effects of the business environment, with particular interest on the impact of finance on firm growth by focusing on differences across firm size. Unlike past studies, we use firm level data that allows us to interrogate whether the impact of the business environment is unbiased across firm size. Most importantly, this paper mitigates the risk of the potential measurement error, omitted variable bias, and endogeneity. The results suggest that micro, small, and medium enterprises (MSMEs) in Uganda benefit more from financial access than large firms. These effects are stronger and more sustained among medium firms. The paper interprets these results as evidence that MSMEs are more credit constrained relative to large firms. The paper also discerns that while informality and poor regulatory environment may help divert economic activity from large firms to MSMEs, informality increases the vulnerability of MSMEs to corruption to sustain their informal and invisible status. The policy implication on size, efficiency, and dynamism of the business sector in Uganda is that there is a need to increase not only financial inclusion of MSMEs but also improve the general business environment, particularly the formalization of micro firms.
Highlights
Extensive evidence shows that investment climate and in particular financial inclusion is critical to firm growth.1 This issue is even more important in developing countries where markets and institutional infrastructure are less developed (Aterido, Hallward-Driemeier, & Pagés, 2009). Olawale and Garwe (2010) identify lack of finance as a key factor constraining micro, small, and medium enterprises (MSMEs) growth in sub-Saharan Africa (SSA)
Results suggest that lack of finance and a weak business environment tends to hurt the growth of micro, small, and medium firms, and benefits the growth of large firms
The paper shows that the use of endogenous variables to measure the effects of finance on firm growth are only significant on medium-sized firms due to downward bias
Summary
Extensive evidence shows that investment climate and in particular financial inclusion is critical to firm growth. This issue is even more important in developing countries where markets and institutional infrastructure are less developed (Aterido, Hallward-Driemeier, & Pagés, 2009). Olawale and Garwe (2010) identify lack of finance as a key factor constraining micro, small, and medium enterprises (MSMEs) growth in sub-Saharan Africa (SSA). Extensive evidence shows that investment climate and in particular financial inclusion is critical to firm growth.. Extensive evidence shows that investment climate and in particular financial inclusion is critical to firm growth.1 This issue is even more important in developing countries where markets and institutional infrastructure are less developed (Aterido, Hallward-Driemeier, & Pagés, 2009). Olawale and Garwe (2010) identify lack of finance as a key factor constraining micro, small, and medium enterprises (MSMEs) growth in sub-Saharan Africa (SSA). The importance of finance to firms is documented by Beck and Demirguc-Kunt (2006) who asserts that financial inclusion helps alleviate MSMEs growth constraints and increases their access to external finance, leveling the playing field between firms of different sizes. Djankov, La Porta, Lopez-De-Silanes, and Shleifer (2002) find that sub-Saharan countries tend to have heavier regulation of entry due to higher
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