Financial accessibility and MSME’s labour productivity: evidence from developing countries

Abstract

Purpose This study aims to re-examine the relationship between financial accessibility and performance of micro, small and medium enterprises (MSMEs) in developing countries using a large database. Design/methodology/approach This study uses cross-sectional firm-level data from the World Bank Enterprises Survey database collected under Wave II from 2006 to 2019. Controlled for firm level and country level factors, OLS and instrumental variable regressions have been used for analysis. Firm performance has been measured in terms of labour productivity. Findings The study observes a positive association between access to finance and MSME performance measured in terms of sales and value-added per worker. Along with firm characteristics (like size, age and managerial experience), country’s development level, institutional quality (i.e. corruption and regulations) and economic openness also impact MSMEs’ productivity. Practical implications Strengthening the financial system to allow the financial sector to meet the requirements of MSME finance is very important. Better access to external finance will enable MSMEs to invest in upgrading technology and expanding operations, thus improves their labour productivity. As the MSME sector is vulnerable to economic shocks, policies facilitating their access to formal credit during crises could strengthen resilience. Social implications Credit constraint to MSMEs is a multi-stakeholder problem. It requires a coordinated approach from MSME owners, financial institutions and policymakers to address it and enhance the credit flow to the MSME sector. Timely research inputs from academia, research institutions and think tanks may help assess MSMEs promotion policies and their revision if needed. Originality/value To the best of the authors’ knowledge, this is the first study that examines the effect of access to finance on the labour productivity of MSMEs in developing countries. Given the mixed results in the recent past between access to finance and firm performance, it highlights the critical role of financial accessibility in improving their labour productivity and thus enabling MSMEs to realise their full potential in developing countries.