Impact of Credit Constraints on Firms Growth: A Case Study of Manufacturing Sector of Pakistan

Abstract

This study explores the impact of credit constraint on growth by using firm level data of manufacturing sector of Pakistan for the period of 1974-2010 analyzing via Generalized Method of Moments (1991) one step and two step estimation technique. Result of full sample shows that the firms in manufacturing sector for the period from 1974-2010 are not facing external financial constraints and the effect of sale to capital ratio indicates the availability of investment opportunities for the firms in the manufacturing sector of Pakistan. The results for pre and post financial sector reform era shows that firms are facing tight external financial constraints in pre financial reform era as compared to post financial reform era. Results show that growth of firms having small assets is constrained by internal finance whereas firms having medium and large assets are not constrained by internal finance. Similarly, firms’ growth that is less dependent on debt finance is constrained by internal finance whereas results for the firms that are moderately and highly aggressive in financing with debt indicate that the growth of firms belonging to these groups is not constrained by internal finance. Similarly, low dividend paying firms growth is constrained by internal finance whereas high dividend paying firms’ growth is not constrained by internal finance.