Skip to main content

Advertisement

SpringerLink
Log in

Use of borrowed start-up capital and micro enterprises in Mexico: existence of liquidity constraints

  • Original Article
  • Published:
Portuguese Economic Journal Aims and scope Submit manuscript

Abstract

Using the National Survey of Micro enterprises (ENAMIN, Encuesta Nacional de Micronegocios) data I test for the presence of liquidity constraints for obtaining start-up capital in Mexico’s credit markets (formal and informal). I use the bivariate probit model with partial observability to recognize two important decisions in the credit allocation process: first, whether an owner of a micro enterprise wants to apply start-up loan and, second, whether financial institutions decide to provide or not to provide the loan. Finally, I compare the results from this model to those of a simple probit model that looks at whether a micro enterprise owner gets funding or not (i.e. the probit model implicitly assumes that no liquidity constraints exist). The findings of this study show that there is substantial heterogeneity in the socioeconomic background of borrowers, as well as in the sources for start-up capital employed by micro enterprises in Mexico. Moreover, there is clear evidence of liquidity constraints in the market for start-up capital that could hinder the creation and growth of small enterprises. Applying the findings of the study, policy makers could fundamentally increase the effectiveness in establishing an economic environment that fosters growth.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. According to Lyberaki and Pesmazoglou (1994), the renaissance of interest in SMEs is not new. There is considerable historical evidence of two centuries, originating from Prodhoun idealized and utopian craft communities, continuing with Russian populists, who considered SMEs to be an “alleged alternative to capitalism”, adopted by neopopulists in development theory with dominant theoretical discussions from the “appropriate technology” and “small is beautiful”, and ending up in the discussion around the informal sector.

  2. Large number of case studies (as of at the end of 2002) of microfinance activity have been published since 1990.

  3. In Mexico, the population of 12 years old or older is considered as the working age population in spite of the fact that, legally, the minimum working age is 14 years (with restrictions up until 16 years).

  4. It is recognized that the aggregate output of micro enterprises does not represent 92% of the GDP since micro enterprises do not represent 100% of the industries in the five sectors.

  5. The urban areas sampled in the ENAMIN are those included in the National Urban Employment Survey: Ciudad Júarez, Chihuahua, Cd. México, Guadalajara, León, Matamoros, Mérida, Monterrey, Nuevo Laredo, Orizaba, Puebla, San Luis Potosí, Tampico, Tijuana, Torreón and Veracruz. The ENAMIN also includes a supplemental sample of 18 smaller urban areas.

  6. Evans and Leighton (1989) used data from the U.S. National Longitudinal Survey of Young Men in their cross-section analysis.

  7. Multiple responses possible.

  8. The higher rates are due to the fact that in the presence of dual financial market sectors, lenders in different sectors face greater uncertainty I deciding whom to lend. Risk can be quantified in differing lending rates but uncertainty is largely unquantifiable. Since micro enterprise owners seem not to have enough collateral they will be often unable to obtain access to funding, even if the projects bring higher returns than those of large enterprises (see Cressy, 1992).

  9. Financial system, financial sector and financial infrastructure are all used interchangeably.

  10. I am not presenting a judgment of the pros and cons of the dual financial sector system and its suitability for hindering or not hindering creation of micro enterprises in less developed countries.

  11. In a strict form the equity contribution refers to a financial asset. However, other forms of equity can be considered and include pledging a household asset, membership fees, and loan application fees (Ledgerwood 1998).

  12. The belief is that by aiding potential entrepreneurs to start up their own businesses, the lending institution will increase their incomes and consequently reduce their level of poverty (Von Pischke 1991).

  13. I test for the existence of credit constraints for borrowed start-up capital. If a micro enterprise owner wants to apply for borrowed capital (working and/or long-term) after operating for a time, the traditional lending criteria are assumed to be applied [The three CCCs (character, collateral, credit history)].

  14. These include: Acapulco, Aguascalientes, Campeche, Coatzacoalcos, Colima, Cuernavaca, Culiacán, Durango, Hermosillo, Manzanillo, Morelia, Oaxaca, Saltillo, Tepic, Toluca, Tuxla Gutiérrez, Villahermosa and Zacatecas.

  15. This list includes all the dependent and independent variables that will be used in the empirical modeling and hypothesis testing. The author is not testing hypothesis related to issues such as, why a certain region of Mexico is relatively more important to getting borrowed start-up capital than an other region. The list of variables is taken from existing literature.

  16. The list of variables does not represent an all-inclusive list of questions asked in the survey instrument. Including measures for productivity, for example, could increase our understanding of how institutions in formal and informal sector determine to whom to lend.

  17. In 1994 3.4 pesos=1 US$.

  18. The commerce sector includes retail and wholesale trade of many different goods (agricultural goods, clothing, household goods, etc.).

  19. N=7,764 (Non-weighted and weighted). 12, 243 owners were selected, 10, 820 were surveyed, and 7,764 completely answered the questions analyzed in Table 1.

  20. Table 2 reports the weighted results of the 7,764 respondents completing the necessary questions for this part of the survey.

  21. The rationale for using probit model instead the multinomial logit model is the uniqueness inherent in allowing the modeling to use a simple probit model while simultaneously using the bivariate probit model with partial observability.

  22. N=2,290 is the non-weighted number of owners answering the applicable questions.

  23. Why owners of micro enterprises in different regions are less or more likely to use formal sector credit sources is outside of the scope of this paper. To extend research into the reasons would provide an interesting opportunity to enrich our understanding of operational factors affecting creation of micro enterprises.

  24. The variables in Tables 4 and 5 (and generally in the paper) are based on literature review and are commonly used various studies. The econometric methodology used is based on either following earlier studies or applying the methodology to a different environment. The author is not explicitly testing for possible endogeneity and/or heteroscedasticity problem.

  25. The numbers in the table cannot be taken to indicate relative strength of the specific variable. The positive or negative sign is indicative of the direction compared to the base and therefore only the direction not the magnitude is implied.

  26. The extension of this study to see whether each variable has a positive or negative effect on the probability of getting a loan from the informal or the formal sector is worthy of further future research (see also Sánchez 1998).

References

  • Abowd John M, Farber Henry S (1982) Job queues and the union status of workers. Ind Labor Relat Rev 35(3):354–367

    Article  Google Scholar 

  • Birch D (1979) The job generation process. MIT Program on Neighborhood and Regional Change, Cambridge, Massachusetts

  • Birch D (1987) Job generation in America. Free, New York, New York

    Google Scholar 

  • Clute RC (1979) An analysis of accounting related problems in small business failure. Natl Public Account 24:24–26 (December)

    Google Scholar 

  • Cressy R (1992) Loan Commitments and Business Starts: An Empirical Investigation on UK Data, SME Centre Discussion Paper, Warwick Business School

  • Daly M, Campbell M, Robson G, Gallagher C (1991) Job creation 1987–1989: the contributions of small and large firms. Employ Gaz 589–596 (November)

  • Davila Alberto, Pagan Jose (1997) The effects of selective INS monitoring strategies on the industrial employment choice and earnings of recent immigrants. Econ Inq 35(1):138–150

    Article  Google Scholar 

  • de Wit Gerrit (1993) Models of self-employment in a competitive market. J Econ Surv 7(4):367–397

    Article  Google Scholar 

  • Edwards Sebastian (1995) Crisis and reform in Latin America. Oxford University Press

    Google Scholar 

  • Evans David S, Jovanovic Boyan (1989) An estimated model of entrepreneurial choice under liquidity constraints. J Polit Econ 97(4):808–827

    Article  Google Scholar 

  • Evans David S, Leighton Linda S (1989) Some empirical aspects of entrepreneurship. Am Econ Rev 79(3):519–535

    Google Scholar 

  • Gaskill LuAnn R, Van Auken Howard E, Manning Ronald A (1993) A factor analytic study of the perceived causes of small business failure. J Small Bus Manage 97:18–31 (October)

    Google Scholar 

  • Greene William H (1997) Econometric analysis. Prentice-Hall, Upper Saddle River, New Jersey

    Google Scholar 

  • Heino Heikki (2000) An analysis of financial issues faced by microenterprises in Mexico. Unpublished Ph.D. dissertation, University of Texas Pan American

  • Kochar Anjini (1997) An empirical investigation of rationing constraints in rural credit markets in India. J Dev Econ 53:339–371

    Article  Google Scholar 

  • Krahnen Jan P, Schmidt Reinhard R (1994) Development finance as institution building: a new approach to poverty-oriented banking. Westview, Boulder, Colorado

    Google Scholar 

  • Larson CM, Clute RC (1979) The failure syndrome. Am J Small Bus 4:35–43 (October)

    Google Scholar 

  • Ledgerwood Joanna (1998) Microfinance handbook: an institutional and financial perspective. The World Bank, Washington, District of Columbia

    Google Scholar 

  • Liargovas Panagiotis (1998) The white paper on growth, competitiveness and employment and Greek small and medium sized enterprises. Small Bus Econ 11:201–214

    Article  Google Scholar 

  • Lyberaki and Pesmazoglou (1994) Mirages and miracles of European small and medium enterprise (SME) development. Research Papers, Hellenic University Association for European Studies, Athens: EKEM

  • Maddala GS (1983) Limited-dependent and qualitative variables in econometrics. Cambridge University Press

    Google Scholar 

  • Maloney William F, Cunningham Wendy V (1998) Heterogeneity in small scale LDC enterprises: the Mexican case. Working paper. University of Illinois at Urbana-Champaign

  • Nabi Ijaz (1989) Investment in segmented capital markets. Q J Econ 104:453–462 (August)

    Article  Google Scholar 

  • Otero Maria, Rhyne Elisabeth (1994) The new world of microenterprise finance: building healthy financial institutions for the poor. Kumarian, West Hartford, Connecticut

    Google Scholar 

  • O’Neill HM, Duker J (1986) Survival and failure in small business. J Small Bus Manage 24:30–37 (January)

    Google Scholar 

  • Poirier D (1980) Partial observability in bivariate probit models. J Econom 12:209–217

    Article  Google Scholar 

  • Peterson RA, Kozmetsky G, Ridgeway H (1983) Perceived causes of small business failures: a research note. Am J Small Bus 8:15–19 (Summer)

    Google Scholar 

  • Sánchez Susana M (1998) The participation of Mexican microenterprises in credit markets: gender differences. Working paper. The World Bank, Washington, District of Columbia

    Google Scholar 

  • Storey D (1994) Understanding the small business sector. Routledge, London

    Google Scholar 

  • Von Pischke JD (1991) Finance at the frontier. World, Economics Development Institute, Washington District of Columbia

    Google Scholar 

  • Wichmann H (1983) Accounting and marketing—key small business problems. Am J Small Bus 7:19–26 (Spring)

    Google Scholar 

  • World Bank (1996) Sustainable banking with the poor: a worldwide inventory of microfinance institutions. Collaborative Publication of ASTHR Gender and Poverty Team and AGRPW Rural Finance at the World Bank July, 1996, pp 1–67

  • World Bank (1999) Guatemala: financial markets in rural areas. Report No. 18853-GT Finance, Private Sector and Infrastructure Central America Country management Unit Latin America and the Caribbean Region Office. January 20 1999

Download references

Author information

Authors and Affiliations

  1. Governors State University, University Park, IL, 60417, USA

    Heikki Heino

Authors
  1. Heikki Heino
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Heikki Heino.

About this article

Cite this article

Heino, H. Use of borrowed start-up capital and micro enterprises in Mexico: existence of liquidity constraints. PEJ 5, 1–30 (2006). https://doi.org/10.1007/s10258-006-0001-x

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10258-006-0001-x

Keywords

JEL Classification

Search

Navigation