Michael Grimm / Simon Lange / Jann Lay

Credit-constrained in Risky Activities? The Determinants of the Capital Stocks of Micro and Small Firms in Western Africa

GIGA Working Paper, No. 185, January 2012

Abstract
Micro and small enterprises (MSEs) in developing countries are typically considered to be severely credit constrained. Additionally, high business risks may partly explain why the capital stocks of MSEs remain low. This article analyzes the determinants of the capital stocks of MSEs in poor economies focusing on credit constraints and risk. The analysis is based on a unique, albeit cross‐sectional but backward‐looking, micro data set on MSEs covering the economic capitals of seven West‐African countries. The main result is that capital market imperfections indeed seem to explain an important part of the variation in capital stocks in the early lifetime of MSEs. Furthermore, the analyses show that risk plays a key role in capital accumulation. Risk‐averse individuals seem to adjust their initially low capital stocks upwards when enterprises grow older. MSEs in risky activities owned by wealthy individuals even seem to over‐invest when they start their business and subsequently adjust capital stocks downwards. As other firms simultaneously suffer from capital shortages, such behaviour may imply large inefficiencies.

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Apl. Prof. Dr. Jann Lay is head of GIGA Research Programme 3 “Growth and Development.” He is also an adjunct professor of development economics at the University of Göttingen. His research interests encompass various aspects of economic development in the Global South and Africa in particular, including (informal) employment and labour markets, the effects of so-called “land grabs”, and energy- and climate-related topics.

Recent Publications by the Authors

Sebastian Renner / Jann Lay / Michael Schleicher

The effects of energy price changes: heterogeneous welfare impacts and energy poverty in Indonesia

Environment and Development Economics, 24, 2019, 2, 180-200

Claudia Dislich / Elisabeth Hettig / Jan Salecker / Johannes Heinonen / Jann Lay / Katrin M. Meyer / Kerstin Wiegand / Suria Tarigan

Land-use change in oil palm dominated tropical landscapes: an agent-based model to explore ecological and socio-economic trade-offs

PLOS ONE, 2018

Insa Flachsbarth / Simone Schotte / Jann Lay / Alberto Garrido

Rural structural change, poverty and income distribution: evidence from Peru

The Journal of Economic Inequality, 16, 2018, 4, 631-653

Sebastian Renner / Jann Lay / Hannes Greve

Household welfare and CO2 emission impacts of energy and carbon taxes in Mexico

Energy Economics, 72, 2018, 222-235