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Financial constraints and productivity growth across the size spectrum: microeconomic evidence from Morocco

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Abstract

To what extent do financial constraints act as conditioning factors on firm productivity? Is this impact different across firm size classes and across sectors and in what way is it different? We explore these issues for Morocco. We use firm level data, taken from two surveys of the World Bank Enterprise Surveys (WES) for Morocco (2004, 2007), to investigate the relationship between two proxies of a firm’s financial constraint (perceived financial constraint as the most serious obstacle and credit constraint) and its productivity growth. The analytical framework assumes a Cobb–Douglas production function for firms where technical progress is not exogenous but depends on financial constraint. Two different econometric estimates are adopted: within estimators and GMM system estimates to address endogeneity and to correct for potential selection, simultaneity and omitted-variable bias (OVB). The estimations using the GMM give results that are consistent with the expectations: they show that each of the two financial constraint proxies has a significant and negative impact on small- and medium-sized firms (i.e. firms with less than 100 workers) but not on large firms (i.e. firms with more than 100 workers). To see whether the main results of the analysis persist (i.e. credit constraints harm small-sized firms more than large-sized firms) several robustness checks are performed. We change the threshold of the separation between small- and large-sized firms from 100 to 50 workers. We keep the threshold at 100 but exclude alternatively small-sized firms that are too small (less than 20 workers) and the large-sized firms that are too large (more than 500 workers). We keep the threshold to 100 and the whole sample but add a control variable which gives the legal status of the firm. Finally, we examine the sensitivity of the results to the sectoral composition of the sample. The main result holds for all sectors except “Wearing apparel”.

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Notes

  1. In Guariglia (2008) a firm characterised by a limited availability of cash flow is considered as internally financially constrained. By contrast, a firm with limited access to external finance is referred to as an externally financially constrained firm. The two types of constraints are related: firms facing internal financing constraints are. in fact, likely to find it more difficult to obtain external finance.

  2. Elston et al. (2016) reveal that informal capital is still the primary means of firm start-up and growth for Chinese firms which do not make extensive use of financial markets, banks, and credit cards as primary sources of capital for starting up their firm, unlike in market-based financial systems like the USA or Germany. Complementary information is provided by Ogane (2016) who examines the effect of the number of correspondent financial institutions for small- and medium-sized enterprises (SMEs) at the first settlement of accounts on subsequent firm bankruptcy risk. Using survival models, the finding is that the risk of firm bankruptcy increases with the number of correspondent financial institutions.

  3. The paper suggests that SMEs can adopt network alliances to minimise their resource constraints. SMEs’ network alliances such as joint ventures, R&D cooperation and firms that are co-located in the industrial zones positively influence firms’ labour productivity and innovation performance.

  4. Productivity in this literature is measured in various ways, e.g. labour productivity; TFP measured as a production function residual, using either the Olley and Pakes (1996) or the Levinsohn and Petrin (2003) method.

  5. Leverage is measured by total liabilities over total assets. Liabilities include current liabilities + non-current liabilities, where current liabilities = bank loans + accounts payable + other current liabilities.

  6. The borrowing ratio is defined as interest payments divided by the sum of profits before tax, depreciation, and interest payments.

  7. It was divided into three key strategic areas of focus: (1) improvement of governance and business climate; (2) strengthening of competitiveness and regional integration by upgrading infrastructures; (3) human development and strengthening of the social sectors, so as to improve the living conditions of the population.

  8. See Silva and Carreira (2012) for a survey of the main strategies proposed in the recent literature for the development of new measures of firms’ financial constraints and key advantages and disadvantages of each measure.

  9. Taking first differences of Eq. (2), all firms’ observed and unobserved time-invariant fixed effects drop out and, hence, in this way we also remove the bias in estimating the coefficients that occur because of the omission of establishment fixed effects.

  10. We should also not have self-selection bias, as the dependent variable is productivity growth (not level) and we have the log of the value added per worker in 2004 as explanatory variable.

  11. The Sargan test regresses the residuals from the IV estimation of the equation of interest on the instruments and uses the R2 to test the significance of this regression. The test statistic is the number of observations times the R2 and has a Chi-squared distribution. Its degree of freedom is equal to the number of instrument minus the number of variable to be instrumented (Sekkat 2011).

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Authors and Affiliations

  1. DISES, CELPE, FEMISE, University of Salerno, Via Giovanni Paolo II, 84084, Fisciano, Salerno, Italy

    Anna M. Ferragina & Fernanda Mazzotta

  2. Centre Emile Bernheim, Université Libre de Bruxelles, Brussels, Belgium

    Khalid Sekkat

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  1. Anna M. Ferragina
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  2. Fernanda Mazzotta
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  3. Khalid Sekkat
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Correspondence to Anna M. Ferragina.

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Ferragina, A.M., Mazzotta, F. & Sekkat, K. Financial constraints and productivity growth across the size spectrum: microeconomic evidence from Morocco. Eurasian Bus Rev 6, 361–381 (2016). https://doi.org/10.1007/s40821-016-0055-3

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