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Can the Business Environment Explain International Differences in Entrepreneurial Finance?

Leora Klapper's picture

It is well established that financial development is necessary for the efficient allocation of capital and firm growth, yet firm-level surveys have repeatedly found access to finance to be among the biggest hurdles to starting and growing a new business. For instance, in the World Bank’s Enterprise Surveys standardized dataset for 2006-2009, 31% of firm owners around the world report access to finance as a major constraint to current operations of the firm, while this figure is 40% for firms under three years of age.

In a recent paper with Larry Chavis and Inessa Love we address two types of questions: (1) What is the relationship between firm age and sources of external financing? and (2) Is there a differential impact of the business environment on access to financing by young versus old firms? 

To summarize, we find systematic differences in the use of different financing sources for new and older firms. We find that in all countries younger firms rely less on bank financing and more on informal financing. However, we also find that young firms have relatively better access to bank finance in countries with stronger rule of law and better credit information and that the reliance of young firms on informal finance decreases with the availability of credit information.

Prospects for Recovery in Eastern Europe

Ryan Hahn's picture

According to a new paper by World Bank economists Paulo Correa and Mariana Iootty, the recovery won't look pretty. The financial crisis and concomitant global economic crisis have had a disproportionately harsh impact on young and innovative firms in Eastern Europe, and this does not bode well for future growth prospects.

A few weeks ago, our corner of the World Bank hosted an event where Correa and Iootty presented their findings. (This was the first in a new series called FPD Academy that will highlight excellent new analytical work on financial and private sector development.) Video of the event appears below the jump. The presentation itself starts at 4:30 and runs to 27:30. A discussant provides remarks immediately after the presentation, and a Q&A follows. 

Easterly Bait

Ryan Hahn's picture

University World News reports that the world record for the longest lecture has been broken. Errol Tapiwa Muzawazi, a 25-year-old law student, clocked in at 121 hours. (According to the rules, lecturers are allowed to snooze briefly every hour.) Muzawazi narrowly beat an Indian professor who lectured for 120 hours in 2008. His goal? To raise awareness of the Millennium Development Goals.