Finance and Employment in Developing Countries: The Working Capital Channel

August 15, 2017

Preview Citation

Format: Chicago

Mai Dao, and Lucy Qian Liu. Finance and Employment in Developing Countries: The Working Capital Channel, (USA: International Monetary Fund, 2017) accessed September 18, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We study the effect of external financing constraint on job creation in emerging markets and developing countries (EMDC) at the firm level by looking at a specific transmission channel - the working capital channel. We develop a simple model to illustrate how the need for working capital financing of a firm affects the link between financial constraint and the firm's job creation. We show that the effect of relaxing financial constraint on job creation is greater the smaller the firm scale and the more labor-intensive its production structure. We use the World Bank Enterprise Surveys data to test the main predictions of the model, and find strong evidence for the working capital channel of external finance on firm employment.

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

Publication Details

Pages:

47
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/189
Stock No:

WPIEA2017189
ISBN:

9781484314197
ISSN:

1018-5941

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