As barriers to firm entry are pervasive across low-income countries, policy has often focused on removing explicit barriers in order to promote job creation and economic growth. However, recent research has questioned the importance of such efforts as reducing explicit entry barriers may not necessarily result in the most productive firms entering the market. This project explores the importance of financial constraints as a barrier to entry and growth, and examines whether the easing of credit constraints can induce entry of more dynamic start-ups with greater long-run growth potential than by easing conventional entry barriers.
The researchers develop and test a framework for identifying the effect of credit constraints on entry, growth, and the evolution of firm size distribution in the formal sector of Brazil. The project uses the spatial variation in the growth patterns of small entering firms in Brazil and examines the effect of different credit policies on this variation. They aim to show how relaxing credit constraints can select for higher quality entrants than reducing explicit entry barriers can, as credit constraints cause high-ability entrepreneurs to enter at smaller sizes than they would in the absence of such constraints.
This research will yield valuable policy implications not only for Brazil, but also for many low-income (LIC) and lower-middle income countries (LMIC). The study hopes to reveal successful credit policies which may then be piloted and tested in settings where takeoff in the formal sector is most constrained. This will provide insights into the importance of financial frictions for firm growth and employment generation in LICs and LMICs.
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