Financial and Legal Constraints to Growth : Does Firm Size Matter?

Market imperfections, such as those caused by underdeveloped financial and legal systems, are usually considered constraints on a firm's ability to obtain capital.A past study has shown that firms in countries with developed financial institutions and efficient legal systems obtain capital more easily than in countries with less developed ones.That study, though, is based only on the largest firms in each economy studied. The present research proposes to consider the effects of financial, legal, and corruption problems on firm size. Data are taken from a size-stratified survey of over 4,000 firms in 54 countries.The questions sought to identify obstacles to firm performance and growth internationally. The World Business Environment Survey is used to identify the level of financing, legal and corruption obstacles in each country.An attempt is made to determine: (1) whether firm growth is affected by financial and legal imperfections and corruption, (2) whether such constraints affect firms depending on their size, (3) whether firms characterized as small, medium or large are affected differently in nations with different levels of financial and institutional development; (4) what characteristics of legal systems can improve firm growth, and (5) the effects of corruption among financial intermediaries. It was determined that the smallest firms are consistently the most constrained.Financial and institutional development diminishes the effects of financial, legal, and corruption constraints, and small firms experience the greatest benefit.Also indicated was that the relation between quality of the legal system and firm growth is weak. Corruption of bank officials is shown to constrain growth. Policy implications are also considered.. (TNM)