Open AccessFinancing Constraints: Determinants and Implications for Firm Growth in Pakistan
Author(s) -
Hamna Ahmed,
Naved Hamid
Publication year - 2011
Publication title -
the lahore journal of economics
Language(s) - English
Resource type - Journals
eISSN - 1811-5446
pISSN - 1811-5438
DOI - 10.35536/lje.2011.v16.isp.a14
Subject(s) - access to finance , finance , external financing , economics , probit model , business , investment (military) , instrumental variable , financial system , debt , politics , political science , law , econometrics
This study has a twofold objective: (i) to investigate the determinants offirm growth, specifically the extent to which finance constrains enterprisegrowth; and (ii) to explore the determinants of external financial access inPakistan. External financial access is defined as access to credit throughinstitutional sources such as private commercial banks, nonbank financialinstitutions, and state-owned banks and agencies. The study uses data from thesecond round of the Investment Climate Assessment Survey conducted by theWorld Bank in FY 2007. The methodology entails using an instrumental variableapproach to estimate the impact of external financial access on firm growth whileemploying a probit model to explore the determinants of external financial access.The results suggest the following: First, finance is a binding constraint to firmgrowth in Pakistan—a 10 percent increase in the working capital financedthrough external sources is predicted to increase the average annual growth rateby 5.6 percentage points. Second, financial depth is important for access—acrossthe country, access is better where there is greater penetration of financialinfrastructure. Third, a range of internal factors such as size, export status,quality of human capital, and organizational form emerge as importantdeterminants of external financial access in Pakistan.