Abstract:
This study has a twofold objective: (i) to investigate the determinants of
firm growth, specifically the extent to which finance constrains enterprise
growth; and (ii) to explore the determinants of external financial access in
Pakistan. External financial access is defined as access to credit through
institutional sources such as private commercial banks, nonbank financial
institutions, and state-owned banks and agencies. The study uses data from the
second round of the Investment Climate Assessment Survey conducted by the
World Bank in FY 2007. The methodology entails using an instrumental variable
approach to estimate the impact of external financial access on firm growth while
employing a probit model to explore the determinants of external financial access.
The results suggest the following: First, finance is a binding constraint to firm
growth in Pakistan—a 10 percent increase in the working capital financed
through external sources is predicted to increase the average annual growth rate
by 5.6 percentage points. Second, financial depth is important for access—across
the country, access is better where there is greater penetration of financial
infrastructure. Third, a range of internal factors such as size, export status,
quality of human capital, and organizational form emerge as important
determinants of external financial access in Pakista
