Let there be Light! Firms Operating under Electricity Constraints in Developing Countries

Many developing countries are unable to provide their industrial sector with reliable electric power and many enterprises have to contend with insufficient and unreliable electricity supply. Because of these constraints, enterprises often opt for self-generation even though it is widely considered a second best solution. This paper develops a theoretical model of investment behavior in remedial infrastructure when physical constraints are present. It then tests econometrically implications from this model using a large sample of enterprises from 87 countries from the World Bank enterprise survey database. After showing that these constraints have non-linear effects according to the natural degree of reliance on electricity of an industrial sector and on firm size, the paper draws differentiated policy recommendations. Credit constraints appear to be the priority in sectors very reliant on electricity to spur entry and convergence to the technological frontier while, in other sectors, firms would benefit more widely from marginal improvements in electrical supply.