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.

West Africa, credit constraints, firm growth, informal sector, micro and small enterprises, risk, risk aversion
ISS Staff Group 1: Economics of Sustainable Development
International Institute of Social Studies of Erasmus University (ISS)

Grimm, M, Lange, S, & Lay, J. (2012). Credit-constrained in risky activities? The determinants of the capital stocks of micro and small firms in Western Africa. ISS Staff Group 1: Economics of Sustainable Development. Retrieved from http://hdl.handle.net/1765/39061