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Credit-constrained in Risky Activities? The Determinants of the Capital Stocks of Micro and Small Firms in Western Africa

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  • Grimm, Michael
  • Lange, Simon
  • Lay, Jann

Abstract

Micro and small enterprises (MSEs) in developing countries are typically considered to be severely credit constrained. Additionally, high business risks may partly explain why the capital stocks of MSEs remain low. This article analyzes the determinants of the capital stocks of MSEs in poor economies focusing on credit constraints and risk. The analysis is based on a unique, albeit cross-sectional but backward-looking, micro data set on MSEs covering the economic capitals of seven West-African countries. The main result is that capital market imperfections indeed seem to explain an important part of the variation in capital stocks in the early lifetime of MSEs. Furthermore, the analyses show that risk plays a key role in capital accumulation. Risk-averse individuals seem to adjust their initially low capital stocks upwards when enterprises grow older. MSEs in risky activities owned by wealthy individuals even seem to over-invest when they start their business and subsequently adjust capital stocks downwards. As other firms simultaneously suffer from capital shortages, such behaviour may imply large inefficiencies.

Suggested Citation

  • Grimm, Michael & Lange, Simon & Lay, Jann, 2012. "Credit-constrained in Risky Activities? The Determinants of the Capital Stocks of Micro and Small Firms in Western Africa," GIGA Working Papers 185, GIGA German Institute of Global and Area Studies.
    • Handle: RePEc:zbw:gigawp:185
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    More about this item

    Keywords

    informal sector; micro and small enterprises; credit constraints; risk; risk aversion; firm growth; West-Africa;
    All these keywords.

    JEL classification:

    • D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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