Misallocation and financial constraints among firms in Sub-Saharan Africa

Misallocation has been generally proven to lower aggregate TFP and drive per capita GDP differences across countries. This paper investigates the extent to which financial constraints contribute to the firm-level resource misallocation that is present in 12 sub-Saharan African countries. The study calibrates a misallocation model by Hsieh and Klenow (2009) with intermediate inputs as an additional factor input using firm-level data from the Enterprise Survey of the World Bank to derive measures of capital, labor, and output misallocation. It then conducts an empirical exercise to establish a link between these measures of misallocation and financial constraints. The analysis finds that the latter significantly increases output distortions, and that size is the main channel. Smaller firms are more financially constrained and in consequence face more distortions that prevent them from growing to optimal size. The lack of access to adequate financing therefore explains the large size of micro enterprises in African countries.