Abstract:
We examine two key questions in this paper: does access to finance have an association with firm level productivity? And does the fiscal environment have an effect on the relation between access to finance and firm productivity? Our answers are that restrictions to access to finance leads to lower firm productivity and the fiscal policy environment can affect the relation between access to finance and firm productivity. Firm-level total factor productivity is from a Cobb-Douglas production function, which we regress on firm characteristics and fiscal policy indicators. With controls for country and year fixed effects, we find that firms reporting access to finance as a severe obstacle have lower productivity, and productivity declines with age. In restricting the sample to
African countries, the fiscal policy effect is not observed directly while it is evident in the global sample but rather through severity of access to credit. Macro-level analysis shows a negative domestic credit to GDP relation with aggregate total factor productivity growth but the value of manufactured exports has a positive relation with aggregate total factor productivity. African countries need to do more to make fiscal policy an
enabling mechanism for economic growth.
