burdensome. For instance, 42 percent of pioneering firms in FCS operate in the services sector, compared to only 25 percent in non-FCS. Conversely, only 37 percent of pioneering firms in FCS are in manufacturing, which contrasts with 64 percent elsewhere.

Third, banking systems struggle to develop in fragile states. Fiscally strained governments often crowd out credit to the private sector, and banks lack the capital to expand lending. Reflecting this, only 27 percent of pioneering firms in FCS have a line of credit or a loan when compared with 41 percent of pioneering firms in countries which are not FCS. Consequently, a higher proportion of firms in FCS rely on internal funds to finance their investments and working capital. Unsurprisingly, a much higher proportion of pioneering firms in FCS identify access to finance as a ‘major constraint’ when compared with firms elsewhere (36 percent, as compared to 21 percent).

Fourth, weak education systems and a large population of children lead to low educational outcomes, which limits the availability of an adequate labor pool.<sup>17</sup> That constraint affects pioneers significantly more than any other constraints, since firms cannot rely on education systems for functional skills, which by the definition of innovation do not exist in the market. This is a problem for pioneers regardless of fragility. Hence, in both fragile and non-fragile contexts they try to economize on the need for skill, and employ a significantly lower proportion of skilled workers. However, due to the nature of pioneering, they are unable to find many of the skills they need, and so must invest significantly more in training programs than is the case with other firms. Training is a form of investment that must somehow be financed, and the distinct lack of access to finance in fragile states presumably curtails the ability to provide the training programs that all pioneers need. This is consistent with our finding that although pioneers everywhere invest more in training, those in fragile states provide significantly less training.

But perhaps most crucial is the lack of entrepreneurial capacity to pioneer new enterprises and expand existing ones. Why is this missing? Enterprise sponsors face higher costs and difficulties when operating in fragile states, so they usually go in one of three directions. They may move their assets and business out of the country, joining the diaspora. They may limit the size of their activities to small, informal businesses that can ‘fly below the radar’ and do not need a lot of government engagement or support. Or they may engage in rent-seeking opportunities to take advantage of the many economic distortions in fragile states. The last response is particularly problematic for DFIs supporting enterprise growth, as once sponsors become associated with illegal behavior, most DFIs will not be willing to work with them.

Netting out sectoral characteristics allows us not only to assess more precisely the ‘constraint premium’, but also to assess the relative severity of the constraints facing pioneers in FCS (see Figure 2), as opposed to pioneers in other developing countries. In fragile states, the top-ranked constraint facing pioneers is political instability. In addition, this is highly distinctive to fragile states; in other states, such a concern is negligible and insignificant. Will governments overregulate or under-regulate? Will they impose unpredictable and predatory taxes? Will they be pressured to make corrupt payments? Moving down from political instability, several constraints are ranked as approximately equally important. These are access to power, land, and finance; and

> 17 World Bank Group, 2016.

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