## Finance and Employment in Developing Countries: The Working Capital Channel

_IMF Working Papers, August 15, 2017_

## Source details

**Canonical URL:** [Finance and Employment in Developing Countries: The Working Capital Channel](https://www.imf.org/en/publications/wp/issues/2017/08/15/finance-and-employment-in-developing-countries-the-working-capital-channel-45068)

## Other formats

- [Markdown version](/en/publications/wp/issues/2017/08/15/finance-and-employment-in-developing-countries-the-working-capital-channel-45068/index.md)
- [Structured JSON version](/en/publications/wp/issues/2017/08/15/finance-and-employment-in-developing-countries-the-working-capital-channel-45068/index.json)
- [Bundle manifest](/en/publications/wp/issues/2017/08/15/finance-and-employment-in-developing-countries-the-working-capital-channel-45068/bundle-manifest.json)

## Bibliographic details
- Authors: Mai Dao, Lucy Qian Liu
- Published: August 15, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484314197.001

---

### Main objective and approach
- Study the effect of external financing constraint on job creation in emerging markets and developing countries (EMDC) at the firm level by examining the working capital channel.
- Develop a simple model to illustrate how the need for working capital financing affects the link between financial constraint and a firm's job creation.
- Empirically test the model's main predictions using the World Bank Enterprise Surveys data.

### Key analytical findings (model)
- The effect of relaxing financial constraint on job creation is greater:
  - the smaller the firm scale, and
  - the more labor-intensive the firm's production structure.
- The model focuses on the working capital financing requirement as the specific transmission channel linking external finance and firm employment.

### Empirical findings (World Bank Enterprise Surveys)
- The authors find strong evidence for the working capital channel of external finance on firm employment.
- The empirical analysis is presented as tests of the model's main predictions using firm-level survey data.

### Subjects and keywords
- Subject: Economic theory, Employment, Financial frictions, Job creation, Labor, Labor share
- Keywords: Central and Eastern Europe, Employment, employment growth, Financial constraint, Financial frictions, firm-level employment, fixed capital, job creation, Labor share, optimization problem, panel data, right-hand-side variable, small firm, survey database, working capital financing, WP

---

## Content in this bundle

- **Finance and Employment in Developing Countries: The Working Capital Channel, WP/17/189, August 2017**
  - [Finance and Employment in Developing Countries: The Working Capital Channel, WP/17/189, August 2017 (Markdown version)](/-/media/files/publications/wp/2017/wp17189.pdf.md){rel="alternate" type="text/markdown"}
  - [Finance and Employment in Developing Countries: The Working Capital Channel, WP/17/189, August 2017 (PDF)](/-/media/files/publications/wp/2017/wp17189.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2017/08/15/finance-and-employment-in-developing-countries-the-working-capital-channel-45068_