Credit Access And Firm Employment Growth: An Endogenous Treatment Effect Analysis Of Constrained And Unconstrained Enterprises In Liberia

Abstract

Access to credit has long been recognised as a major hindrance to the performance and survival of small enterprises, mainly in developing countries. Nevertheless, country-specific evidence on the difference between the performance of firms that are considered credit-constrained and unconstrained remain narrow. In this light, the current study provides empirical evidence using an endogenous treatment effect analysis to first investigate the determinants of firms credit access status (i.e. constrained or unconstrained) and how it affects firms employment growth in Liberia. The study used unique enterprise-level data from the 2017 edition of the World Bank Enterprise Survey, covering 151 firms in the non-agricultural private economy of Liberia. Findings suggest that being constrained to accessing credit negatively affects firm employment growth, leading to reduced annual employment growth rates for constrained firms. It was also revealed that indicators of credit market participation and firm financial history were negatively correlated with being credit constrained. The study recommends that improvements in the availability of information between firms and financial institutions are crucial to reducing credit constraints. By promoting small businesses participation in the credit market and reducing prevailing information asymmetries whether by creating formal business associations or startup incubator programs, firms can improve their credit-worthiness and fully exploit their full employment potential.