WHAT IS PRE VENTING FIRMS FROM CREATING MORE AND BE T TER JOBS?
Commercial downscaling and microfinance institution upscaling should be led by banks themselves. Governments can facilitate the process by creating an enabling regulatory and institutional environment—by, for example, revising rules on provisioning and credit bureau reporting, which make it expensive to serve smaller firms. Governments can also look into using credit guarantee schemes and other financial products aimed at reducing the risk associated with lending to small and medium-size enterprises. Such schemes would address information asymmetries, the high costs of processing small credit transactions, and constraints in the enforcement of contracts.
Provide technical assistance and financial literacy training Small and medium-size enterprises face several nonfi nancial barriers that are related to their own capacity. Managers or owners of such fi rms usually perform a wider range of tasks than their managers or owners of larger firms. Moreover, small and medium-size enterprises cannot take advantage of economies of scale related to accounting, business planning, and market research to the same extent as large fi rms can. Enterprise survey data indicate that only 37 percent of small fi rms have their annual fi nancial statement reviewed by an external auditor, compared with 58 percent of medium-size fi rms and 79 percent of large fi rms (Hoxha 2011). In Bangladesh, a quarter of smaller urban fi rms fi nd the procedures for applying for a loan too complex (compared with only 1.2 percent of large urban fi rms) (World Bank 2008c). Only about 5 percent of village enterprises and 11 percent of small town enterprises in Pakistan prepare fi nancial statements. Technical assistance and fi nancial literacy training can be provided to small and medium-size enterprises to increase their capacity to keep better accounts and develop and present bankable proposals. Doing so would ensure that such enterprises have the capacity to successfully apply for loans and effectively use loans for the growth of their businesses.
Notes 1. The first study sets out the methodological framework and tests predictions of how a firm’s evaluation of the cost of constraints imposed by its external environment varies with the firm’s characteristics. These tests confirm the predictions of the model and provide the empirical basis for using, in the second and third studies, the reported severity of constraints to assess which elements of the external environment are most problematic for firms across South Asia and in each country. 2. Eighteen constraints appear in the enterprise surveys: electricity; telecommunications; transport; access to land; inadequately educated labor; macroeconomic instability; government policy uncertainty; political instability; access to finance; competition; tax administration; tax rates; labor regulations; customs; business licensing; courts; corruption; and crime, theft, and disorder. Surveys in Afghanistan, Bhutan, and Nepal did not ask about macroinstability or government policy uncertainty. Surveys in India, Maldives, and Sri Lanka did not ask about political instability. 3. The World Bank enterprise surveys portal contains data on almost 120,000 urban formal firms (16,000 in South Asia) from more than 230 surveys in 126 countries conducted between 2000 and 2010 (see http://www .enterprisesurveys.org/). 4. The Bangladesh rural survey covered periurban areas, small towns, and rural villages. The Pakistan rural survey covered small towns and rural villages. The Sri Lanka rural survey covered rural areas as defined by the Department of Census and Statistics. 5. Only the 2001 survey was used in the formal analysis of the severity of constraints, because the constraint question in 2005 did not use the standard 0–4 scale. The ranking of constraints from the 2005 informal survey was used to check the results. 6. In addition, to facilitate better comparison, firms with more than 20 employees were dropped from the sample of urban formal firms. 7. The states were grouped based on net state domestic product per capita over the previous 10 years. 8. Empirical evidence on other developing regions indicates that because they lack the economies of scale to operate a power
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