loan and were rejected or that were discouraged from applying for a loan.<sup>9</sup> The data also include extensive information on the sources of firms’ investments in fixed assets. These sources can be external (formal or informal) or internal.<sup>10</sup> Confirming the findings of Cabral and Mata (2003), figure 2 shows that the firm size distribution is skewed to the right and that the skewness tends to diminish with age. The size distribution of older firms is more symmetric than that of young firms.

As shown in figure 3, the firm size distribution is skewed more to the right in the manufacturing and services sectors, where micro and small firms make up about two-thirds of the sample. Figure 4 suggests that Africa has the largest share of micro and small firms while other regions have more medium-size and large firms. This again provides evidence of the “missing middle” in Africa.

Using the indicator of credit constrained created for this analysis, we split the sample into two groups, credit-constrained and non-credit-constrained firms. As figure 5 shows, the firm size distribution is skewed to the right for credit-constrained firms. This result is in line with the finding that being credit constrained has a negative effect on firm growth—and, especially, that this effect is largest for small firms. Taking this analysis further, we investigate the firm size distribution using the survey data on firms’ perceptions of access to finance, splitting the sample between those perceiving it as a major or very severe obstacle and those viewing it as a minor obstacle or no obstacle. Figure 6 shows that the size distribution of firms perceiving access to finance as a major or very severe obstacle is skewed to the right. This result is confirmed by the data for our sample showing that most of the firms regarding access to finance as a major or very severe obstacle are micro or small. The size distribution for firms perceiving access to finance as a minor obstacle or no obstacle is more symmetric.

The findings in this and previous sections suggest that a low level of financial development results in a skewed firm size distribution, with a larger relative share of small firms. Policies favoring the development of the financial sector should therefore have an effect on the firm size distribution and, ultimately, favor the adoption of different technologies and an improved allocation of resources if the industry in question is in line with the country’s comparative advantages (Lin, 2010).

# **9. Conclusion**

Using a newly available data set from the World Bank Enterprise Surveys (2006–10) for 39,538 firms across 98 countries, we investigate the binding constraints on firms’ employment growth. With an econometric model and subjective measures, we find that access to finance and informal sector competition are the most binding constraints—both globally and in each region. Using objective

> 9 Our measure of credit-constrained firms comprises those that applied for a loan and were rejected and those that did not apply for one or more of the following reasons: fear of rejection, collateral requirements too high, interest rates not favorable, or a belief that the application would not be approved.

> 10 Formal sources are private or public banks, nonbank financial institutions, issues of new debt, and suppliers’ credit. Informal sources are friends and moneylenders. Internal sources consist of issuances of new shares and own funds.

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