Product Market Competition, Capital Constraints and Firm Growth

Abstract

We examine the impact of product market competition on quantity-of-capital constraints in 58 countries. Prior work shows that competition increases the costs of debt and equity, which reduce the economic profit from investment. Capital constraints, however, may prevent firms from exploiting all positive NPV projects. Using econometric techniques and unique survey data, we avoid endogeneity problems common to the study of both capital constraints and product market competition. We find that product market competition increases capital constraints and it is a more important determinant of capital constraints than banking competition. Finally, we show that quantity-of-capital constraints negatively impact firm growth.