Capital Constraints and Competitiveness: Exploring the Finance-Productivity Linkages of MSMEs in Developing Countries

MSMEs in developing countries face greater survival and growth challenges than their counterparts in developed countries, primarily due to limited resources and inadequate institutional frameworks. Credit constraints significantly impede MSMEs’ growth by limiting capital investment needed for technological upgrades, productivity improvements, enhanced competitiveness, and market expansion. It also affects their resilience during the economic crisis and their business cycles. Empirically, there are mixed results regarding the effect of access to finance on firm performance. Further, there is less research in the context of developing countries than in developed countries. The present study uses the World Bank Enterprises Survey to reassess the relationship between access to finance and firm productivity of MSMEs in Developing countries. The study found that notwithstanding regional variations, access to finance has significantly affected the firms’ performance in developing countries. The study suggests that concerted efforts by MSME owners, financial institutions, and governments in developing countries are required to address the persistent issue of credit constraints of MSMEs.