1. Doing Business Flashcards
What is the ‘missing middle’?
The idea that in developing countries, distribution of firm size is bimodal - a lot of small firms, large firms, and the “missing middle” - very few medium sized firms.
What are the conventional explanations for ‘missing middle’?
Hsieh & Olken (2014)
2 explanations:
- Small firms are disfavored in low income countries
- by lack of access to financial capital (also because many of them are informal)
- because government favors large firms (because many are state owned)
- Others say that large firms are actually disfavoured through larger costs of regulation, which makes it difficult for middle sized firms to get established
Is there empirical evidence of the ‘missing middle’?
Hsieh & Olken (2014)
No.
Data from India, Indonesia and Mexico shows no evidence of missing middle ->
medium sized firms are missing, but so are large firms
The average product of labour and capital is significantly lower in small firms when compared to large firms → important because some theories say that small firms do not grow because they face high marginal costs of capital → but this evidence suggests that large firms rather than small firms are the ones suffering the large fixed costs or shortage of capital that could stifle their growth.
No evidence that regulatory obstacles generate a missing middle.
How did the misconception of the ‘missing middle’ arise?
Hsieh & Olken (2014)
Say one reason is how we choose to measure the size of firms. The missing middle happens when we look at the distribution of firm sizes, but if we look at the employment share (what fraction of total manufacturing employment comes from firms of a specific size), then there is no evidence of missing middle.
What are the policy implications considering there is no ‘missing middle’?
- relax constraints on larger businesses
- programs such as microcredit or simplified tax regimes that benefit only small firms may worsen the development problem by further increasing the incentive to stay small
What are some common challenges with the financial system in Sub-Saharan Africa (SSA)?
Hansen & Rand (2014)
- Commercial banks dominate the financial sector and relatively few banks account for the majority of total bank assets
- in the non-bank financial institutions (a small addition to the overall credit availability), average loan sizes are considerably smaller and interest rates higher than in the commercial bank sector
- the coverage of informal (local moneylender) and semi-informal (trade-credit) loan markets is also rather restricted
- limited competition has resulted in a rigid financial system with low levels of financial intermediation, high-profit margins, and a large interest rate spread between deposits and loans
What are credit-constrained firms?
An enterprise is credit constrained if it:
(i) applied and was denied credit or
(ii) did not apply for credit due to reasons such as “application procedures to complex”, “collateral requirements unattainable”, or “possible loan size and maturity insufficient”
What is the relationship between gender and the probability of being credit constrained?
Hansen & Rand (2014)
- enterprises owned by female entrepreneurs are on average 4 percentage points less likely to be credit constrained compared to their male counterparts
- the gender gap in credit is reversed for medium-sized firms compared to micro and small firms. For micro and small enterprises, male-owned firms are more likely to be credit constrained than female-owned firms
- the credit constraint gap is caused by favoritism towards micro and small enterprises with female ownership (not based on firm efficiency and productivity)
What are the policy implications of the credit constraint gap based on gender?
Hansen & Rand (2014) suggest that donors and policy-makers, instead of calling for more credit to small female-owned firms, should focus the effort on improving the functioning and competitiveness of the financial sector in sub-Saharan Africa and support female entrepreneurs in other ways than by (mere) policy-driven bank credit.
