Financial constraints, firm productivity and cross-country income differences: Evidence from sub-Sahara Africa

Financial constraints have significant implications on firm productivity growth and cross-country income distribution. This study analyses the dynamics of firm productivity and cross-country income differences in a sample of 9 African countries using a stochastic frontier estimator on recent 2016 World Bank Enterprise Survey data. After controlling for firm heterogeneity, we find large dispersions in marginal revenue products of capital and labour and efficiencies between financially constrained and unconstrained firms. Financially constrained firms have 6.6 percent lower marginal revenue product of capital relative to unconstrained firms. Moreover, constrained firms are also more inefficient and less productive relative to unconstrained firms. Constrained firms are 15 percent less efficient due to borrowing constraints compared to unconstrained firms.