## Macro-Structural Obstacles to Firm Performance: Evidence from 2,640 Firms in Nigeria

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---

### Abstract and Main Findings
- Sample: 2,640 private firms in the manufacturing and services sectors in 19 states in Nigeria (WBES, 2014-15).
- Top self-reported obstacle: Access to finance identified as the number one constraint by one-third of surveyed firms.
- Firm characteristics associated with access to finance and export diversification:
  - Larger and export-oriented firms are about 40 percentage points less likely to report access to finance as a business obstacle, compared to smaller and non-export-oriented firms.
  - Firms perceiving access to finance as a constraint are, on average, about 10-40 percentage points less likely to be export-oriented diversified firms.
- Impact on firm performance:
  - Firms that perceive access to credit as a constraint have, on average, around 80 percent lower employment growth compared to firms where access to finance is not perceived as a constraint.
  - These firms also have around 30 percent lower capacity utilization growth.
- Robustness: Results hold across ordered logit/probit vs binary logit/probit, alternate model specifications, inclusion of country fixed dummies, and an endogenous treatment regression approach correcting for potential endogeneity.

### Survey Data and Stylized Facts (WBES Nigeria, 2014-15)
- Coverage and eligibility:
  - Survey covers formally registered private firms with employees in manufacturing, retail, or other services; firms with 100 percent state ownership are excluded.
  - Firm size classification: micro (less than 5 employees), small (5-19), medium (20-99), large (more than 99 employees).
- Firm characteristics (selected statistics preserved from survey findings):
  - Average firm years in operation: around 16 years (range by size: average low of 14 years in small firms to a high of 27 years in large firms).
  - Ownership: Most surveyed firms are sole ownership; most firms are domestically owned.
  - Market orientation: Most firms sell to national (domestic) markets; indirect and direct exports are less common.
  - Skills in hiring: Specific technical skills are the most important in hiring decisions, followed by social skills.
  - Skills and gender: Skills are not a constraint to hiring women in more than 60 percent of cases.
- Performance and investment patterns:
  - Micro-sized firms appear to have experienced the highest growth in both employment and capacity utilization.
  - Over 80 percent of surveyed firms did not spend on formal research and development activities over the last 3 years.
  - Only large firms have been able to marginally invest in improving research and production methods.
  - Combining export orientation (>10 percent of sales) with R&D/improved production measures defines export diversification; firms with higher export diversification show better firm performance.

### Financial Sector Context and Comparative Indicators
- Legal environment vs implementation:
  - Nigeria’s “getting credit” sub-component of the ease of doing business index is among the best in the world, indicating a supportive legal framework for access to credit; however, firm survey responses point to implementation gaps and impediments to accessing credit.
  - Banks’ lending to the private sector limited by high risk aversion and high-yield risk-free government and Central Bank of Nigeria (CBN) bills which are not conducive for lending given fear of credit risk.
- Financial development trends:
  - Financial development in Nigeria (index capturing financial access and efficiency across financial institutions and markets) was similar in the 1980s to current emerging market and frontier economies but has only slightly improved over the past three decades.
  - Financial access (measured by ownership of an account at a financial institution) increased significantly between 2011 and 2017, but remained relatively flat between 2014 and 2017.

### Model, Methodology, and Key Empirical Results
- Dependent variable (Access to finance):
  - Constructed from ordinal responses to: “To what degree is access to finance an obstacle to their current operations of this establishment?” with responses ranging from “No obstacle” (value of 0) to “Very severe obstacle” (value of 4).
- Estimation approaches:
  - Ordered logit/probit estimated by maximum pseudo-likelihood with Accesstofinanceist = f(Xist, ExportDiversificationist), where Xist includes firm age, export status, size, ownership structure, manager experience and education levels.
  - Binary logit/probit used by suppressing responses into 0/1 in alternate specifications.
  - Endogenous treatment regression employed to correct for potential endogeneity and allow causal interpretation.
- Empirical findings (preserved quantitative estimates):
  - Larger and export-oriented firms are about 40 percentage points less likely to report access to finance as a business obstacle.
  - Firms perceiving access to finance as a constraint are, on average, about 10-40 percentage points less likely to be export-oriented diversified firms.
  - Firms perceiving access to credit as a constraint have, on average, around 80 percent lower employment growth and around 30 percent lower capacity utilization growth relative to unconstrained firms.
  - Results robust across estimation techniques and robustness checks.
- Estimation sample sizes and diagnostics (selected):
  - Table 1 observations: 2,498; 2,447; 2,471; 759 across different specifications.
  - Table 2 observations: 2,539 across models (7)-(10).
  - Treatment-effects models (Table 3) sample sizes: Employment growth models: 895 and 884; Capacity utilization growth models: 978 and 965.
  - Reported rho values: .0123, .0209, .526, .579 across models; LR test for independent equations: 219.40***, 220.48***, 10.13***, 20.47***.
  - Log likelihood: -3441.283; -3403.866; -595.496; -590.481. AIC: 6914.566; 6845.732; 1222.992; 1218.963. BIC: 6991.316; 6936.637; 1301.16; 1311.534.
  - Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1. Estimation is done using survey weights. Survey weights are not used to estimate the LR test for independent equations, AIC and BIC. Constant and dummies not reported.

### Determinants of Access to Finance and Export Diversification (Selected Results)
- Access to finance:
  - Larger and export-oriented firms, on average, are about 40 percentage points less likely to report access to finance as a constraint compared to smaller and non-export-oriented firms.
  - Foreign firms are, on average, around 30 percentage points less likely to report access to finance as a constraint compared to domestic-owned firms.
  - Higher manager education levels show some evidence of easier access to credit in some specifications.
  - Weak evidence on gender: the dummy on female top manager is positive and weakly statistically significant in one model. Manager experience shows little association.
- Export diversification:
  - Firms perceiving access to finance as a constraint are, on average, about 10-40 percentage points less likely to be export-oriented diversified firms (models 7-10).
  - Younger firms are, on average, 40-75 percentage points less likely to report diversified exports.
  - Foreign ownership is strongly associated with more diversified exports in all specifications.
  - Results robust to adding sectoral dummies and size/sector fixed effects.

### Policy-Relevant Observations and Recommendations
- Implementation gap:
  - Despite a supportive legal framework for credit (high ease-of-doing-business “getting credit” scores), constraints reported by firms point to implementation and market-related impediments (bank risk aversion, attractive risk-free yields on government instruments).
- Targeting constraints:
  - Smaller, younger, and domestically owned firms are more likely to face access-to-finance constraints and are less likely to be export-diversified.
  - Policies that improve access to finance for smaller and younger firms could increase export diversification and support employment and capacity utilization gains.
- Specific policy recommendations:
  - Improve access to credit information and collateral registry usage (borrowers’ legal right to inspect credit data; 2017 Secured Transactions in Movable Assets Act enabling MSMEs to use movable assets as collateral).
  - Ensure banks make full use of the National Collateral Registry and increase credit registry coverage (Nigeria as a percentage of adults stood at 0.1% compared to OECD’s average of 63.7%).
  - Accelerate implementation of the government’s financial inclusion strategy, including reforming the regulatory framework and leveraging mobile payments to boost credit access in remote areas.
  - Promote export diversification via technology and innovation, supporting SMEs, and encourage vertical and horizontal diversification with emphasis on technological upgrading and international competition.
  - Address structural constraints to growth and diversification: increase public investment efficiency; accelerate implementation of the Power Sector Recovery Plan; improve education and health outcomes; strengthen governance, transparency and anti-corruption initiatives; strengthen the business environment through PEBEC and complementary structural reforms.
- Growth payoff estimate:
  - Recent empirical evidence suggests raising financial development and inclusion in Nigeria to the average level in emerging market economies could yield additional real per capita GDP growth of more than 0.8 percentage points per year (IMF 2019).

### Conclusion
- Summary:
  - Using survey data from 2,640 private firms in Nigeria, the study finds:
    - Larger and export-oriented firms are about 40 percentage points less likely to report access to finance as a business obstacle.
    - Firms perceiving access to finance as a constraint are, on average, about 10-40 percentage points less likely to be export-oriented diversified firms.
    - Better access to finance and export diversification could have positive causal effects equivalent to 80 percent higher employment growth and 30 percent higher capacity utilization growth.
  - Ownership structure and firm age also explain firm performance in some specifications.
  - Results hold under different specifications and estimation techniques.
- Policy priority:
  - Increasing access to finance for smaller and younger firms and promoting export diversification and technological upgrading are key priorities aligned with Nigeria’s Economic Recovery and Growth Plan (ERGP).

*Source: IMF Working Paper WP/20/62, “Macro-Structural Obstacles to Firm Performance: Evidence from 2,640 Firms in Nigeria” by Amr Hosny (May 2020), Sections 1–3.*

### Section 1

### Macro-Structural Obstacles to Firm Performance: Evidence from 2,640 Firms in Nigeria

### Abstract and Main Findings
- Sample: 2,640 private firms in the manufacturing and services sectors in 19 states in Nigeria (WBES, 2014-15).
- Top self-reported obstacle: Access to finance identified as the number one constraint by one-third of surveyed firms.
- Firm characteristics associated with access to finance and export diversification:
  - Larger and export-oriented firms are about 40 percentage points less likely to report access to finance as a business obstacle, compared to smaller and non-export-oriented firms.
  - Firms perceiving access to finance as a constraint are, on average, about 10-40 percentage points less likely to be export-oriented diversified firms.
- Impact on firm performance:
  - Firms that perceive access to credit as a constraint have, on average, around 80 percent lower employment growth compared to firms where access to finance is not perceived as a constraint.
  - These firms also have around 30 percent lower capacity utilization growth.
- Robustness: Results hold across ordered logit/probit vs binary logit/probit, alternate model specifications, inclusion of country fixed dummies, and an endogenous treatment regression approach correcting for potential endogeneity.

### Introduction and Contribution to the Literature
- Objectives:
  - (i) Study firm characteristics associated with more access to finance and export diversification.
  - (ii) Quantify the impact of these structural obstacles on firm performance in Nigeria.
- Contribution:
  - First study using firm-level WBES data in Nigeria to link access to finance and export diversification and quantify their impact on firm performance.
  - Situates firm-level analysis within mixed theoretical literature on finance, growth, and exports (references in source: Levine 2004; Ayyagari et al 2016; Benmelech et al 2011; Melitz 2003; Bellone et al 2010; Chor and Manova 2012; Ahn et al 2011; Eaton et al 2016; Levchenko et al 2010).

### Survey Data and Stylized Facts (WBES Nigeria, 2014-15)
- Coverage and eligibility:
  - Survey covers formally registered private firms with employees in manufacturing, retail, or other services; firms with 100 percent state ownership are excluded.
  - Firm size classification: micro (less than 5 employees), small (5-19), medium (20-99), large (more than 99 employees).
- Firm characteristics (selected statistics preserved from survey findings):
  - Average firm years in operation: around 16 years (range by size: average low of 14 years in small firms to a high of 27 years in large firms).
  - Ownership: Most surveyed firms are sole ownership; most firms are domestically owned.
  - Market orientation: Most firms sell to national (domestic) markets; indirect and direct exports are less common.
  - Skills in hiring: Specific technical skills are the most important in hiring decisions, followed by social skills.
  - Skills and gender: Skills are not a constraint to hiring women in more than 60 percent of cases.
- Performance and investment patterns:
  - Micro-sized firms appear to have experienced the highest growth in both employment and capacity utilization.
  - Over 80 percent of surveyed firms did not spend on formal research and development activities over the last 3 years.
  - Only large firms have been able to marginally invest in improving research and production methods.
  - Combining export orientation (>10 percent of sales) with R&D/improved production measures defines export diversification; firms with higher export diversification show better firm performance.

### Financial Sector Context and Comparative Indicators
- Legal environment vs implementation:
  - Nigeria’s “getting credit” sub-component of the ease of doing business index is among the best in the world, indicating a supportive legal framework for access to credit; however, firm survey responses point to implementation gaps and impediments to accessing credit.
  - Banks’ lending to the private sector limited by high risk aversion and high-yield risk-free government and Central Bank of Nigeria (CBN) bills which are not conducive for lending given fear of credit risk.
- Financial development trends:
  - Financial development in Nigeria (index capturing financial access and efficiency across financial institutions and markets) was similar in the 1980s to current emerging market and frontier economies but has only slightly improved over the past three decades.
  - Financial access (measured by ownership of an account at a financial institution) increased significantly between 2011 and 2017, but remained relatively flat between 2014 and 2017.

### Model, Methodology, and Key Empirical Results
- Dependent variable (Access to finance):
  - Constructed from ordinal responses to: “To what degree is access to finance an obstacle to their current operations of this establishment?” with responses ranging from “No obstacle” (value of 0) to “Very severe obstacle” (value of 4).
- Estimation approaches:
  - Ordered logit/probit estimated by maximum pseudo-likelihood with Accesstofinanceist = f(Xist, ExportDiversificationist), where Xist includes firm age, export status, size, ownership structure, manager experience and education levels.
  - Binary logit/probit used by suppressing responses into 0/1 in alternate specifications.
  - Endogenous treatment regression employed to correct for potential endogeneity and allow causal interpretation.
- Empirical findings (preserved quantitative estimates):
  - Larger and export-oriented firms are about 40 percentage points less likely to report access to finance as a business obstacle.
  - Firms perceiving access to finance as a constraint are, on average, about 10-40 percentage points less likely to be export-oriented diversified firms.
  - Firms perceiving access to credit as a constraint have, on average, around 80 percent lower employment growth and around 30 percent lower capacity utilization growth relative to unconstrained firms.
  - Results robust across estimation techniques and robustness checks.

### Policy-Relevant Observations and Implications
- Implementation gap: Despite a supportive legal framework for credit (high ease-of-doing-business “getting credit” scores), constraints reported by firms point to implementation and market-related impediments (bank risk aversion, attractive risk-free yields on government instruments).
- Targeting constraints:
  - Smaller, younger, and domestically owned firms are more likely to face access-to-finance constraints and are less likely to be export-diversified.
  - Policies that improve access to finance for smaller and younger firms could increase export diversification and support employment and capacity utilization gains.
- Link to national strategy:
  - Aligns with Nigeria’s Economic Recovery and Growth Plan (ERGP) emphasis on a more business-friendly environment and harnessing private sector dynamism for growth and job creation.

*Source: IMF Working Paper WP/20/62, “Macro-Structural Obstacles to Firm Performance: Evidence from 2,640 Firms in Nigeria” by Amr Hosny (May 2020), Section 1.*

### Section 2

### wpiea2020062-print-pdf - Section 2

### Determinants of Access to Finance
- Sample and methods
  - Analysis builds on WBES and recent work by Kuntchev et al. (2013), EBRD/EIB/WB (2016), Hosny (2017, 2018).
  - Ordered and binary Logit/Probit models estimated (Table 1). Estimation is done using survey weights. City/Region FE and Size FE used in some specifications.
- Key findings
  - Larger, export-oriented firms are less likely to report access to finance as a business obstacle.
    - Larger and export-oriented firms, on average, are about 40 percentage points less likely to report access to finance as a constraint compared to smaller and non-export-oriented firms.
    - Coefficients on firm size and export orientation are negative and statistically significant (Table 1; models 1-3).
  - Foreign ownership and manager education
    - Foreign firms are, on average, around 30 percentage points less likely to report access to finance as a constraint compared to domestic-owned firms.
    - Higher manager education levels show some evidence of easier access to credit (models 1 and 3).
  - Gender and other controls
    - Weak evidence on gender and access to finance constraints: the dummy on female top manager is positive and weakly statistically significant in one model.
    - Manager experience shows little association.
  - Export diversification
    - Export diversification has an inconclusive impact on access to credit; possible explanations include overlap with export orientation variable or reverse causality.
- Table 1 sample sizes and notes (selected)
  - Observations: 2,498; 2,447; 2,471; 759 across different specifications.
  - Standard errors in parentheses. Constant and dummies not reported. *** p<0.01, ** p<0.05, * p<0.1.

### Determinants of Export Diversification
- Model and variables
  - Binary Logit/Probit models estimated for export diversification using typical firm characteristics and access to finance as explanatory variables (Table 2).
  - Size FE and Sector FE applied in different specifications.
- Key findings
  - Access to finance is positively associated with export diversification.
    - Firms perceiving access to finance as a constraint are, on average, about 10-40 percentage points less likely to be export-oriented diversified firms (models 7-10).
    - Results robust to adding sectoral dummies (models 8 and 10).
  - Firm age and ownership
    - Younger firms are, on average, 40-75 percentage points less likely to report diversified exports.
    - Foreign ownership is strongly associated with more diversified exports in all specifications.
- Table 2 sample sizes and notes
  - Observations: 2,539 across models (7)-(10).
  - Standard errors in parentheses. Estimation is done using survey weights. Constant and dummies not reported. *** p<0.01, ** p<0.05, * p<0.1.

### Access to Finance and Firm Performance (Causal Analysis)
- Outcome variables and empirical strategy
  - Dependent variables: measures of firm performance — growth of employment and capacity utilization.
  - Endogeneity concern: perception of access to finance may be endogenous to firm performance.
  - Method: endogenous treatment-regression model (treatment-effects estimators) estimated by MLE to correct for selection/endogeneity bias (Heckman; Maddala; Cameron and Trivedi; Wooldridge).
- Main causal findings (Table 3)
  - Access to finance as obstacle has a statistically significant negative effect on firm performance after correcting for endogeneity.
    - Firms who perceive access to credit as a constraint have, on average, around 80 percent lower employment growth and around 30 percent lower capacity utilization growth, compared to other firms (reported in text discussing Table 3).
    - Treatment-effects model: LR test for independent equations rejects the null of no correlation between treatment-assignment and outcome errors in all reported models.
    - Estimated correlation ρ is positive in all models, indicating unobservables that raise firm performance tend to occur with unobservables that raise the perception of effect of access to finance on firm operations.
  - Export diversification and manager characteristics
    - Better firm performance is associated with higher export diversification (positive and statistically significant coefficients in models 12 and 14).
    - Manager education correlates with firm performance in some specifications (note: higher values of the education indicator indicate lower levels of education).
    - Some evidence that female managers are associated with better capacity utilization in one model (model 14).
- Table 3 sample sizes and diagnostics (selected)
  - Observations: Employment growth models: 895 and 884; Capacity utilization growth models: 978 and 965.
  - rho: .0123, .0209, .526, .579 across models.
  - LR test for independent equations: 219.40***, 220.48***, 10.13***, 20.47***.
  - Log likelihood: -3441.283; -3403.866; -595.496; -590.481.
  - AIC: 6914.566; 6845.732; 1222.992; 1218.963.
  - BIC: 6991.316; 6936.637; 1301.16; 1311.534.
  - Estimation is done using survey weights. Survey weights are not used to estimate the LR test for independent equations, AIC and BIC. Constant and dummies not reported. *** p<0.01, ** p<0.05, * p<0.1.

### Conclusion and Policy Implications
- Summary of empirical findings
  - Using survey data from 2,640 private firms in Nigeria:
    - Larger and export-oriented firms are about 40 percentage points less likely to report access to finance as a business obstacle.
    - Firms perceiving access to finance as a constraint are, on average, about 10-40 percentage points less likely to be export-oriented diversified firms.
    - Better access to finance and export diversification could have positive causal effects equivalent to 80 percent higher employment growth and 30 percent higher capacity utilization growth (conclusion phrasing).
  - Ownership structure and firm age also explain firm performance in some specifications.
  - Results hold under different specifications and estimation techniques.
- Policy recommendations and priorities
  - Increase access to finance as key for diversification:
    - Government initiatives to improve access to credit information and collateral registry are important (borrowers’ legal right to inspect credit data; 2017 Secured Transactions in Movable Assets Act enabling MSMEs to use movable assets as collateral).
    - Need to ensure banks make full use of the National Collateral Registry and to increase credit registry coverage (Nigeria as a percentage of adults stood at 0.1% compared to OECD’s average of 63.7%).
    - Accelerate implementation of the government’s financial inclusion strategy, including reforming the regulatory framework and leveraging mobile payments to boost credit access in remote areas.
    - Recent empirical evidence suggests raising financial development and inclusion in Nigeria to the average level in emerging market economies could yield additional real per capita GDP growth of more than 0.8 percentage points per year (IMF 2019).
  - Promote export diversification and technological upgrading:
    - Export diversification via technology and innovation is key to higher and sustainable growth.
    - Emphasize development of diversified non-oil tradable sectors, supporting SMEs that account for most employment and output contribution in developing countries.
    - Encourage vertical and horizontal diversification in existing and new export industries with emphasis on technological upgrading and competition in international markets.
  - Address structural constraints to growth and diversification:
    - Increase public investment efficiency.
    - Accelerate implementation of the Power Sector Recovery Plan.
    - Step up efforts to improve education and health outcomes.
    - Strengthen governance, transparency and anti-corruption initiatives.
    - Strengthen the business environment through Presidential Enabling Business Environment Council (PEBEC) and complementary structural reforms.

*Source: Section 2 of wpiea2020062-print-pdf*

### Section 3

### Section 3

### Concluding remark
- These reforms are in line with the ERGP's objectives and several reforms already initiated must continue.

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### Appendix: Sample Survey Questions
- Question number — Question  
- Firm characteristics  
  - B.1 What is the firm’s legal status?  
  - D.3a-c What percentage of this establishment’s sales were national sales? Indirect exports? Direct exports?  
  - B.2a-d What percentage of this firm is owned by private domestic? Private foreign? Government/state? Other?  
  - B.5 In what year did this establishment begin operations?  
  - NGL.28 What is the most important skill that typical applicants lack when filling vacancies for production workers?  
  - NGL.15a-e In your experience of hiring production employees, are any of the following constraints to hiring women?  
  - MNAB.7b What is the highest level of education completed by the Top Manager?  
- Firm performance  
  - NGF.1-1a In this financial year, and three financial years ago, what was this establishment’s sales or services rendered as a proportion of the maximum possible using all the resources available (capacity utilization)?  
  - L.1-2 In this fiscal year, and three fiscal years ago, how many permanent, full-time employees worked in this establishment?  
- Obstacles to firms’ operations  
  - M.1 Which of the elements of the business environment included in the list, if any, currently represents the biggest obstacle faced by this establishment?  
  - K.30 To what degree is access to finance an obstacle to their current operations of this establishment?  
- Export diversification  
  - H.7 During the last three years, did this establishment spend on formal research and development activities, either in-house or contracted with other companies?  
  - H.3 During the last three years, has this establishment introduced any new or significantly improved methods for the production or supply of products or services?  

- Source: http://www.enterprisesurveys.org/Methodology

*Source: wpiea2020062-print-pdf - Section 3*

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_Source: https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020062-print-pdf.pdf_