SME Growth, Financing Constraints, and Corruption: Evidence from Transition Economies

Abstract

In this study, using a unique firm-level survey database, I investigate which firm constraints in the business environment directly affect growth for over 15,000 mostly small- and medium-sized firms in 30 Eastern European and Central Asian countries. I also examine how financing constraints inhibit firm growth, the determinants of firm financing constraints, and the relevant role of country-level development, institutions, and corruption. I find that out of a full set of ten different growth constraints in the business environment that firms report, only financing and legal constraints negatively affect both firm sales and employment growth. I also find that older, larger, and foreign-owned firms report lower financing constraints while exporting firms report higher financing constraints. In countries with higher levels of GDP per capita, stock market development, legal systems and property rights, and lower levels of corruption, firms face lower levels of financing constraints. I provide novel empirical evidence that both firm- and country-level corruption hinder firms’ access to financing.