Who Does Not Need Credit? Evidence from Developing Economies

• In Event: Paper Dialogue Session I

Abstract

We use a unique firm-level survey database compiled globally by the World Bank to examine the factors that correlate with a firm declaring it has no need for credit and, hence, has not applied for a bank loan. In particular, using data from 93 countries we report three major findings: First, three sets of measures (a firm’s legal status, the obstacles it faces, and its access to financing) are key factors in explaining firm’s lack of credit need. Second, firms in economies with greater economic freedoms and those belonging in the higher income groups are more likely to respond that they have no need for external credit. By contrast, those firms in transition economies and in economies with higher country growth rates are more likely to have external credit need. Finally, we show that firms who respond with no requiring external credit are more likely to be discouraged (i.e., lower quality) firms than high quality firms with alternative sources of funding like internal funds.

Authors

• Sugato Chakravarty, Purdue University

• Meifang Xiang, University of Wisconsin–Whitewater