institutions, smaller firms report significantly higher financial obstacles than large firms.<sup>74</sup> Likewise, Aterido et al (2007) find, based on objective Enterprise Survey data, that smaller firms have significantly less access to different forms of finance even when controlling for age, export status, ownership and industry.<sup>75</sup> In line with this, the business climate survey data indicates that small firms tend to finance a much smaller share of their investments with formal credits.<sup>76</sup> Bigsten et al. (2003) confirm that in their sample of African countries, close to two-thirds of micro firms are credit constrained, but only 10 percent of large firms. The authors also find that regressions controlling for other important factors such as expected profitability and indebtedness, ‘the likelihood of a successful loan application varies with firm size’ in the same way.<sup>77</sup> Most of the studies employing regression analysis to examine the relationship between firm performance and the business climate include indicators representing measures of financial access. The most pertinent results will be outlined below, keeping in mind the general methodological criticisms of key papers already mentioned in the context of infrastructure indicators.

Beck, Demirgüç-Kunt and Maksimovic (2005) regress firm sales growth on a number of controls as well as one summary<sup>78</sup> and 11 specific<sup>79</sup> subjective indicators of financial obstacles. Entered alongside the legal and corruption summary variables, the financial obstacles main indicator is found to have a negative and significant effect on firm growth. The authors also find 6 of the 11 specific financial constraints indicators having a negative and significant impact, however, because each is entered individually, it is likely that omitted variable bias distorts these results. It should also be noted that Beck et al. do not calculate location-industry averages, rendering their estimates vulnerable to reverse causality at the firm level, as does their reliance on subjective indicators.

Aterido et al.’s (2007) main objective financial constraint indicator is ‘percentage of investments financed externally’ and they take greater care than Beck et al. (2005) to reduce endogeneity at the firm level.<sup>80</sup> Attempting to explain employment growth, they find that in general, a higher share of investments financed externally is associated with greater employment growth. Hallward-Driemeier and Aterido (2007) also find a significantly positive impact of their financial access variable ‘share of investment financed externally’ on firms of all sizes:

> 74 Beck, T., A. Demirgüç-Kunt and V. Maksimovic. 2005: 150.

> 75 Aterido, R., M. Hallward-Driemeier and C. Pagés. 2007: 36 (Table 4) and 8.

> 76 World Bank. 2004: 116.

> 77 Bigsten, A. and M. Söderbom. 2005: 11.

> 78 ‘How problematic is financing for the operation and growth of your business: no obstacle (1), a minor obstacle (2), a moderate obstacle (3), or a major obstacle (4);

> 79 i) ‘Are collateral requirements of bans/financial institutions no obstacle (1), a minor obstacle (2), a moderate obstacle (3), or a major obstacle (4)?’; ii) ‘Is bank paperwork/bureaucracy no obstacle....?’; iii) ‘Are high interest rates no obstacle...?’; iv) ‘Is the need of special connections with banks/financial institutions no obstacle...?’; v) ‘Is banks’ lack of money to lend no obstacle...?’; vi) ‘Is the access to foreign banks no obstacle...?’; vii) ‘Is the access to nonbank equity/investors/partners no obstacle...?’; viii) ‘Is the access to specialized export finance no obstacle...?’; ix) ‘Is the access to ease finance for equipment no obstacle...?’; x) ‘Is inadequate credit/financial information no obstacle...?’; xi) ‘Is the access to long term finance no obstacle...?’;

> 80 Aterido, R., M. Hallward-Driemeier and C. Pagés. 2007: 20.

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