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Market-Based Solutions to Vital Economic Issues

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Market-Based Solutions to Vital Economic Issues
Research
Jul 1, 2010

A New Lease on Life: Institutions, External Financing, and Growth

Abstract

This research utilizes data from the World Bank Investment Climate Survey to examine the use of external capital for almost 70,000 small and medium-sized firms in 103 developing and developed countries. Contrary to conventional wisdom, we find that most small firms in even the poorest countries have access to some type of external financing, however, the sources differ systematically by institutional and firm characteristics. For example, firms in poorer countries, with generally weaker institutions, use far less leasing for new investment and instead rely more on informal sources of capital such as money lenders and credit cards. We confirm that access to external capital is related to faster growth. Surprisingly, leasing is the only source of external finance related to growth in GDP and the manufacturing sector.


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