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Finance and Employment in Developing Countries: The Working Capital Channel

Author

Listed:
  • Mai Dao
  • Lucy Qian Liu

Abstract

We study the effect of external financing constraint on job creation in emerging markets and developing countries (EMDC) at the firm level by looking at a specific transmission channel - the working capital channel. We develop a simple model to illustrate how the need for working capital financing of a firm affects the link between financial constraint and the firm's job creation. We show that the effect of relaxing financial constraint on job creation is greater the smaller the firm scale and the more labor-intensive its production structure. We use the World Bank Enterprise Surveys data to test the main predictions of the model, and find strong evidence for the working capital channel of external finance on firm employment.

Suggested Citation

  • Mai Dao & Lucy Qian Liu, 2017. "Finance and Employment in Developing Countries: The Working Capital Channel," IMF Working Papers 2017/189, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2017/189
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    Citations

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    Cited by:

    1. Florentina Melnic & Daniel Juravle, 2020. "Governance And Access To Finance," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 25, pages 151-168, June.
    2. Nkoumou Ngoa, Gaston Brice & Song, Jacques Simon, 2021. "Female participation in African labor markets: The role of information and communication technologies," Telecommunications Policy, Elsevier, vol. 45(9).
    3. Ainembabazi John Herbert & Francis H. Kemeze, 2022. "Working Paper 366 - Remittances and employment in family-owned firms: Evidence from Nigeria and Uganda," Working Paper Series 2492, African Development Bank.
    4. Brixiová, Zuzana & Kangoye, Thierry & Yogo, Thierry Urbain, 2020. "Access to finance among small and medium-sized enterprises and job creation in Africa," Structural Change and Economic Dynamics, Elsevier, vol. 55(C), pages 177-189.
    5. Khan, Safi Ullah, 2022. "Financing constraints and firm-level responses to the COVID-19 pandemic: International evidence," Research in International Business and Finance, Elsevier, vol. 59(C).
    6. Ouédraogo, Rasmané & Sawadogo, Relwendé & Sawadogo, Hamidou, 2021. "Access to the banking sector and employment in Africa," The Quarterly Review of Economics and Finance, Elsevier, vol. 82(C), pages 260-269.
    7. Luis Rene Cáceres, 2021. "Causes and Consequences of Idle Youth in Guatemala," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 13(1), pages 1-61, January.
    8. Elena Crivellaro & Aikaterini Karadimitropoulou, 2019. "The role of financial constraints on labour share developments: macro- and micro-level evidence," Working Papers 257, Bank of Greece.
    9. Rym Ayadi & Sami Ben Naceur & Mohamed Goaied, 2021. "Financial development and employment: New panel evidence," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 50(2), July.

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