OVERVIEW Unleashing Productivity through Firm Financing Tatiana Didier and Ana Paula Cusolito Overview Unleashing Productivity through Firm Financing Tatiana Didier and Ana Paula Cusolito This booklet contains the overview, as well as front matter, from Unleashing Productivity through Firm Financing, doi:10.1596/978-1-4648-1939-1. A PDF of the final book is available at https://­openknowledge​ .worldbank.org/ and http://documents.worldbank.org/, and print copies can be ordered at www.amazon​.com. Please use the final version of the book for citation, reproduction, and adaptation purposes. © 2024 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank with external contributions. 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Contents Foreword...........................................................................................................................v Preface from the Series Editor.................................................................................. vii Acknowledgments........................................................................................................ ix About the Authors......................................................................................................... xi Overview...........................................................................................................................1 Introduction......................................................................................................... 1 Financial Constraints on Smaller Firms Impact Countries’ Growth and Productivity.................................................................................... 1 Policies Can Unlock Firm Financing Constraints to Boost Productivity and Growth......................................................................... 5 Policy Support Needs to Take a Differentiated Approach toward Debt and Equity Financing................................................................... 7 Policy Targeting Should Reflect the Larger Financing Gaps for Smaller and Innovative Firms........................................ 11 A Supportive Enabling Environment Is the Backbone of Firm Financing .................................................................................................. 13 Conclusions........................................................................................................ 14 Notes.................................................................................................................... 15 References........................................................................................................... 16 Box O.1 Can Fintech Help to Close the Gaps in Firm Financing?.......................................... 6 Figures O.1 Reallocation of Finance Would Lead to Higher Productivity and Growth............. 2 O.2 Smaller Firms Have Larger Financing Gaps in EMDEs............................................ 3 O.3 The Scale Effect Is a Greater Source of Potential Productivity Gains Than the Debt-to-Equity Mix........................................................................................ 8 O.4 Equity Financing in High-Income Countries and Middle-Income Countries ............. 9 iii Foreword Small and medium enterprises (SMEs) employ a large share of the global workforce and are among the most important contributors to job creation and economic develop- ment around the world. However, SMEs face a range of obstacles that hinder their capacity to invest and innovate, which in turn, hampers their critical role as engines of economic growth. Access to finance is a primary constraint for SME growth, particu- larly in emerging market and developing economies (EMDEs). SMEs tend to resort to internal funding rather than external financing. For example, estimates in this volume show that the small firms have debt-to-asset (leverage) ratios of around 65 ­ percent in high-income countries (HICs), whereas similarly sized firms in middle-income coun- tries (MICs) have leverage ratios of about 40 percent. Moreover, those SMES that can borrow often face exorbitantly high interest rates, despite being some of the most pro- ductive firms in their respective markets. While the COVID-19 pandemic has brought renewed attention to the enabling role of financing for firms, there is remarkably little discussion about how financial con- straints affect firm dynamics, and little understanding of the impact on jobs, economic growth, productivity, and overall prosperity. This is a fundamental concern for policy makers and an imperative for the design of effective support policies. For example, policy makers must consider how firms secure funding throughout their life cycles. Which firms are facing critical financing shortfalls? What are the underlying causes for these gaps? How do financial constraints impact resource allocation among firms, and how do they influence the expansion, improvement, and resilience of existing firms? Crafting effective policies in the face of glaring financing disparities for firms is an essential challenge that policy makers must confront. This comprehensive volume, Unleashing Productivity through Firm Financing, provides new evidence on the channels through which financial constraints for firms, particularly SMEs, impinge on countries’ economic growth and productivity. There is a direct relation between firm financing and firm performance. Restricted access to finance has a negative impact on firm growth, investments, and job creation. While access to equity financing can be invaluable in fostering innovation-driven growth, many EMDEs often have under- developed equity markets, with debt being the primary source of financing for firms. Furthermore, a new data set comprising 2.5 million firms across MICs and HICs shows misallocation of finance as costly for MICs. In fact, MICs could obtain gains in aggregate productivity, which would measure firms’ ability to produce more with less, v of up to 86 percent by reducing firms’ financing gaps, particularly for SMEs. MICs with lower gross domestic product per capita would see the largest gains. In addition, access to diversified sources of financing helps firms better manage risks, allowing them to reduce job losses and maintain investment levels. For instance, firms in EMDEs that had access to financing during the COVID-19 pandemic preserved more jobs. The research presented here is part of the World Bank’s Productivity Project. We hope policy makers, researchers, and development practitioners will find value in the fresh insights presented here. We encourage them to further explore the wide range of issues raised and bridge the critical knowledge gaps. Jean Pesme Global Director, Finance Finance, Competitiveness, and Innovation Global Practice World Bank vi Unleashing Productivity through Firm Financing Preface from the Series Editor Productivity accounts for half of the differences in gross domestic product per capita across countries. Identifying policies that stimulate productivity is thus critical to ­ alleviating poverty and fulfilling the rising aspirations of global citizens. In recent decades, however, productivity growth has slowed globally, and the lagging productiv- ity performance of developing countries is a major barrier to convergence with income levels in high-income countries. The World Bank Productivity Project seeks to bring frontier thinking to the measurement and determinants of productivity, grounded in the developing country context, to global policy makers. Each volume in the series explores a different aspect of the topic, fostering a dialogue among academics and pol- icy makers through sponsored empirical work in the World Bank’s client countries. Unleashing Productivity through Firm Financing, the eighth and final volume in the series, does not aspire to offer a distillation of the frontier literature on the links between finance and productivity growth. It rather offers empirical confirmation, in many cases for the first time, that this literature corresponds tightly to the realities of the develop- ing world as well. The major advance is the construction of a data set of 2.5 million private firms across middle- and high-income countries. This permits exploration that was heretofore not possible of the channels through which financial frictions, ­distortions, and market failures constrain firm performance and the efficient allocation of resources across firms. Further, this volume documents that these effects are large— mitigating them potentially can double aggregate productivity in middle-income ­ countries—and particularly detrimental to small firms. This volume also characterizes the importance of debt versus equity for different types of firm activities. The combined ­ findings of this volume and those of the previous volumes in the series show that the ­innovation, growth, agricultural productivity, entrepreneurship, service sector, and technological transfer agendas all depend on deepening and diver- sifying the financial sector and suggest that the policy interventions discussed here merit being ranked high on the reform agenda. William F. Maloney Chief Economist, Latin America and the Caribbean Region Director, World Bank Productivity Project Series World Bank vii Other Titles in the World Bank Productivity Project Bridging the Technological Divide: Technology Adoption by Firms in Developing Countries. 2022. Xavier Cirera, Diego Comin, and Marcio Cruz. Washington, DC: World Bank. Place, Productivity, and Prosperity: Revisiting Spatially Targeted Policies for Regional Development. 2022. Arti Grover, Somik V. Lall, and William F. Maloney. Washington, DC: World Bank. At Your Service? The Promise of Services-Led Development. 2021. Gaurav Nayyar, Mary Hallward-Driemeier, and Elwyn Davies. Washington, DC: World Bank. Harvesting Prosperity: Technology and Productivity Growth in Agriculture. 2020. Keith Fuglie, Madhur Gautam, Aparajita Goyal, and William F. Maloney. Washington, DC: World Bank. High-Growth Firms: Facts, Fiction, and Policy Options for Emerging Economies. 2019. Arti Grover Goswami, Denis Medvedev, and Ellen Olafsen. Washington, DC: World Bank. Productivity Revisited: Shifting Paradigms in Analysis and Policy. 2018. Ana Paula Cusolito and William F. Maloney. Washington, DC: World Bank. The Innovation Paradox: Developing-Country Capabilities and the Unrealized Promise of Technological Catch-Up. 2017. Xavier Cirera and William F. Maloney. Washington, DC: World Bank. All books in the World Bank Productivity Project are available free of charge at https://openknowledge.worldbank.org/handle/10986/30560. viii Unleashing Productivity through Firm Financing Acknowledgments This book was written by Tatiana Didier (senior economist, World Bank) and Ana Paula Cusolito (senior economist, World Bank). The book builds on analytical work by the authors and a series of background papers that were written specifically for this project. For their contributions, we thank Andrea Castagnola, Brian Castro Aguirre, Beulah Chelva, Subika Farazi, Roberto N. Fattal, Jose Ernesto López Córdova, Davide S. Mare, Sergio Muro, Jorge Pena, and Akshat V. Singh. The work was carried out under the guidance of Pablo Saavedra (vice president, Prosperity, World Bank), Jean Pesme (global director, Finance, Competitiveness, and Innovation Global Practice, World Bank), and William F. Maloney (director, World Bank Productivity Project, and chief economist, Latin America and the Caribbean Region, World Bank). We also thank Alfonso Garcia Mora (regional vice president, Latin America and the Caribbean and Europe, International Finance Corporation) and Ayhan Kose (chief economist and director, Development Economics and Chief Economist, Prospects Group, World Bank) for their guidance and support at earlier stages of this project in the roles of global director and chief economist, respectively. We are very thankful to the World Bank peer reviewers who provided key inputs during the concept note review, quality enhancement review, and decision meeting: Randa Akeel (senior financial sector specialist), Steen Byskov (senior financial officer), Ana Fiorella Carvajal (lead financial sector specialist), Robert Cull (research manager), Shanthi Divakaran (senior financial sector specialist), Leonardo Iacovone (lead economist), Mariana Iootty de Paiva Dias (senior economist), Martha Licetti (practice ­ ­ manager), William Maloney (chief economist, Latin America and the Caribbean Region), Andres Martinez (senior financial sector specialist), Martin Melecky (lead economist), Alen Mulabdic (economist), Gaurav Nayyar (lead economist), Ha Nguyen (senior economist), Francesca de Nicola (senior economist), Fausto Patino (econo- mist), Regina Pleninger (economist), Matthew Saal (principal industry specialist), Sergio Schmukler (research manager), Asli Senkal (special assistant), Ilias Skamnelos (practice manager), and Shu Yu (senior economist). We also thank the participants at the authors’ workshop, which took place during October–November 2021, who pro- vided useful comments on draft versions of this work. We thank our publishing team—Patricia Katayama and Mark McClure—for the design, production, and marketing of this book; Nancy Morrison and Sandra Gain for their excellent and timely editorial services; Ann O’Malley for proofreading; and our communications team for its creative energy in promoting the book. ix About the Authors Ana Paula Cusolito is a senior economist in the Finance, Competitiveness, and Innovation Global Practice of the World Bank. Her research focuses on industrial organization, including firm and aggregate productivity as well as its determinants, digital technology adoption, innovation, corporate governance, and foreign competition. She has coauthored World Bank flagship publications, including World ­ Development Report 2019: The Changing Nature of Work, Productivity Revisited: Shifting Paradigms in Analysis and Policy, and The Upside of Digital for the Middle East and North Africa: How Digital Technology Adoption Can Accelerate Growth and Jobs, among others. Her research has been published in the American Economic Review: Insights, The Review of Economics and Statistics, Journal of International Economics, and Journal of Development Economics, among others. Before joining the World Bank, she worked at the Inter-American Development Bank as country ­ economist for Costa Rica. She holds a PhD in economics from Universitat Pompeu Fabra, a master’s degree from Universidad del Centro de Estudios Macroeconómicos de Argentina, and a bachelor’s degree from Universidad Nacional de La Plata. Tatiana Didier is a senior economist in the Finance, Competitiveness, and Innovation Global Practice of the World Bank. Her work focuses on corporate finance and finan- cial sector development, with an emphasis on the challenges for firms in developing countries. She has played a leading role in a number of World Bank country and regional policy engagements. She is also the leading author of several World Bank reports, including Emerging Issues in Financial Development: Lessons from Latin America and the forthcoming “Boosting SME Finance for Growth: The Case for More Effective Support Policies.” Her research has been published in the Journal of Monetary Economics, The Review of Economics and Statistics, Journal of International Economics, and Journal of Financial Stability, among others. She has received two World Bank Financial and Private Sector Development Academy Awards for her research. She holds a PhD in economics from the Massachusetts Institute of Technology. xi Overview Introduction Firms’ ability to finance investments in physical and human capital and innovate through digital, green, and other technologies is central to productivity and economic growth. An extensive literature shows how these productivity-enhancing investments contribute to boosting aggregate output and create new and (sometimes) better jobs. The importance of access to finance to fund firms’ productive investments is uncontested. Yet, a myriad of distortions and frictions can prevent an efficient allocation of financial resources to firms. In turn, financial constraints hinder firms’ ability to make these investments and even to use inputs efficiently, thus negatively impacting firms’ ­productivity and growth. This volume focuses on the links among firm financing, financial constraints, and firm performance, making comprehensive use of firm-level data for private firms (com- prising those not listed in public stock exchanges) and publicly listed firms (referred to as “public firms” throughout this report).1 This volume provides, for the first time, a quantitative assessment of the extent of financial constraints on private firms of differ- ent sizes, the role of distortions in capital structure, and the impact of such constraints on aggregate growth and productivity. That is, it highlights the relevance of the misal- location of finance. The original findings not only provide strong analytical underpin- nings for existing, practical knowledge in supporting access to finance for small and medium enterprises (SMEs) but also have important policy implications to address the financing gaps for firms in emerging market and developing economies (EMDEs).2 Financial Constraints on Smaller Firms Impact Countries’ Growth and Productivity The volume shows that there are acute financial constraints on private firms in middle-income countries (MICs), and these constraints have a sizable negative impact ­ on aggregate productivity and growth. Drawing from a newly constructed data set of 2.5 million private firms in more than 90 MICs and high-income countries (HICs), the volume shows that financial market inefficiencies—namely, financial f ­rictions and market failures—constrain financial flows to firms and, consequently, negatively affect individual firm performance (the within margin) and the allocation of resources across firms (the between margin).3 On the latter, the novel ­ estimates show that miti- gating these inefficiencies, thereby removing market failures and relaxing firms’ 1 financial constraints, can lead to aggregate productivity gains of up to 86 percent in MICs, with the largest gains observed among MICs with lower gross domestic prod- uct (GDP) per capita (figure O.1, panel a). These gains stem from a reallocation of constrained yet productive firms. financial resources toward financially ­ This misallocation of finance is particularly detrimental to smaller firms in a given country.4 The estimation results show that larger productivity gains would accrue for smaller firms than for larger firms from a reallocation of financial resources toward finan- cially constrained yet productive firms. That is, smaller firms would benefit the most countries with from a more efficient allocation of capital across firms, especially those in ­ lower GDP per capita. The results also show that smaller firms tend to experience a larger boost in growth and productive capabilities with capital market financing (figure O.1, panel b). For example, in the year of capital raising through equity or bond issuance, the growth rate of total assets for the smallest firms in the sample is on average 37 percentage points higher than that of firms of similar size that did not raise capital. In contrast, the ­ differential for the largest firms in the sample is only about 7 percentage points. These findings indicate that firms are not using the new funds just to change their capital struc- ture or increase financial investments; rather, with relaxed financial constraints, firms can better realize expected growth opportunities. In MICs, the smaller private firms, particularly those with fewer than 100 employ- ees, face the largest financing gaps. The results show that the debt financing gap is larger for the smaller firms. Although there is virtually no variation in leverage ratios across firms of different sizes in HICs, smaller private firms tend to have significantly lower debt-to-assets ratios than larger firms in MICs. For example, on average, the smallest FIGURE O.1  Reallocation of Finance Would Lead to Higher Productivity and Growth a. Between margin: Productivity gains from b. Within margin: Firm growth around reallocation of capital across firms capital raising activity 90 45 Growth differential of issuing firms versus nonissuing firms (p.p.) 80 40 Reallocation gains (%) 70 35 60 30 25 50 20 40 15 30 10 20 5 10 0 7.5 8.0 8.5 9.0 9.5 10.0 10.5 11.0 11.5 12.0 1 2 3 4 5 6 7 8 9 10 GDP per capita (log) Firm size distribution (deciles) Sources: For panel a, Cusolito et al. 2023; for panel b, calculations based on Didier et al. 2021. Note: Panel a shows the counterfactual aggregate total factor productivity gains for each country if the misallocation of finance were reversed and countries achieved full efficiency. See chapter 5 in the volume for more details. Panel b shows the estimated annual growth rate differential in total assets between issuers and nonissuers at the year of issuance for each decile of the distribution of firm size. Shaded area shows the confidence interval around the estimates. See chapter 4 for more details. GDP = gross domestic product; p.p. = percentage points. 2 Unleashing Productivity through Firm Financing private firms in the sample have debt-to-assets ratios of around 65 percent in HICs, whereas similarly sized firms in MICs have leverage ratios averaging 40 percent figure  O.2, panel a). The smallest private firms in MICs have even lower leverage (­ ratios, around 20 percent. The differential among similarly sized firms between MICs and HICs declines as firms grow, with virtually no differences observed for the largest private firms and publicly listed firms. Thus, these results quantify the so-called “SME financing gap,” which has been an elusive feature in discussions of firms’ access to finance. Overall, firms’ capital structure varies significantly along the firm size distribu- tion for private firms in MICs. FIGURE O.2  Smaller Firms Have Larger Financing Gaps in EMDEs a. Larger debt financing gap for smaller private firms b. Larger equity financing gap for smaller private firms 1.0 100 0.9 Share of venture capital invested in 2010–19 (%) 19 90 0.8 80 46 0.7 16 61 70 Debt-to-asset ratio 0.6 60 15 0.5 50 19 0.4 40 18 0.3 30 8 18 0.2 20 8 32 9 0.1 10 19 6 0 0 6 0 2 4 6 8 10 12 14 16 18 High income Upper-middle Lower-middle Assets (log) income income Private firms, high income 0–60 employees 61–150 employees Private firms, middle income 151–350 employees 351–1,200 employees Publicly listed firms, high income 1,200+ employees Publicly listed firms, middle income c. Larger probability of being financially constrained for smaller firms during COVID-19 25 Probability of being financially constrained (%) 20 15 10 5 0 Micro (0–4) Small (5–19) Medium (20–99) Large (100+) Firm size (number of workers) Sources: For panel a, calculations based on Orbis data; Cusolito and Didier 2022; for panel b, Didier and Cheuva 2023; for panel c, Farazi and Lopez-Cordova 2023. Note: For panel a, see chapter 2 in the volume for more information. In panel b, the statistics consider only completed financing trans- actions. See chapter 3 for more information. In panel c, financially constrained firms are defined as those that have suffered a drop in sales of at least 30 percent during the past 30 days and faced any form of difficulty accessing finance, according to the World Bank COVID-19 Business Pulse Surveys. See chapter 6 for more information. EMDEs = emerging market and developing economies. Overview3 Smaller, innovative private firms in MICs make limited use of both debt and exter- nal equity financing. For example, the estimations show that small firms with high levels of research and development (R&D) have, on average, lower leverage ratios than small, low R&D firms or large firms. The differential in leverage is larger in MICs than in HICs, especially among the smallest firms, indicating that access to debt financing is more challenging for those smaller, innovative firms in MICs. Furthermore, the signifi- cant underdevelopment of private markets for equity financing in EMDEs more broadly constrains the availability of equity financing, leaving smaller, innovative firms under- served. The results show that the bulk of venture capital (VC) and private equity (PE) investments in MICs is concentrated in relatively larger firms. For example, private firms with more than 350 employees accounted for roughly 70 percent of the VC invest- ments in MICs during 2010–19, compared to 35 percent in HICs (figure O.2, panel b). The evidence emerging from the COVID-19 pandemic reinforces these results. Smaller private firms in EMDEs had the highest probability of being financially con- strained during the pandemic. Firms with 100 or more workers had an 11 percent probability of being financially constrained, whereas for firms with fewer than 20 work- ers, the probability jumped to more than 20 percent (figure O.2, panel c). Nonetheless, financially constrained firms were less prevalent in countries where domestic credit to the private sector and GDP per capita were higher. Overall, the ­analyses in this volume point to size-related inefficiencies in financial markets for MICs, which render smaller firms more financially constrained than larger firms and firms of comparable size in HICs. Financial constraints not only hinder the productivity and growth of firms but also constrain their ability to cope with adverse shocks. For instance, the COVID-19 pan- demic was an exogeneous shock that led to an abrupt, steep decline in firms’ revenues, which in turn, challenged their ability to cover expenses and meet their financial ­obligations. The results for a sample of firms in EMDEs show that during the pandemic, firms that had access to financing were better able to maintain employment levels and avoid falling into arrears. Many firms, particularly in countries with lower GDP per capita and with less developed financial markets, were unable to mitigate the effects of the shock, partly because their access to sources of financing was limited. Access to diversified sources of financing can also help firms to weather shocks. The evidence shows that capital market financing can replace bank lending during banking crises, when capital markets might act as a “spare tire,” allowing firms to lessen the adverse effects of the crisis on performance and employment. Hence, firms with limited access to multiple sources of financing (whether debt or equity) are more exposed to the effects of negative shocks, such as those associated with a banking crisis. Larger firms are typically better able to cope with such shocks, especially publicly listed firms with access to capital markets. In contrast, for smaller firms in MICs, which are often dependent on banks for financing, small fluctuations in bank credit can have sizable effects on their investments and growth. 4 Unleashing Productivity through Firm Financing Policies Can Unlock Firm Financing Constraints to Boost Productivity and Growth Addressing the financial constraints on smaller private firms should be a critical ­element of the policy agenda to support firms in EMDEs. Financial sector policies need to address the key financial market failures and frictions underlying the challenges in access to finance for SMEs. The following are at the core of these financial constraints: (1) the greater opacity of SMEs (for example, SMEs tend to lack reliable financial state- ments); (2) their relatively high riskiness (partly a reflection of lower capabilities); and (3) their lack of assets that can be used as collateral, which could mitigate the challenges associated with (1) and (2). Hence, as compared to larger firms, investors and creditors have greater difficulty in assessing smaller private firms’ prospects and creditworthi- ness, monitoring their actions, and enforcing contractual obligations—all of which contribute to a lower likelihood of extending financing to these smaller firms. These challenges tend to be particularly marked in countries with less developed financial systems as additional challenges emerge from inefficiencies in the financial sector itself that also have a disproportionately higher impact on smaller firms in the country. For example, the relatively high transaction costs of processing relatively small loans and inadequate lending technologies can hinder outreach to SMEs. A key recent develop- ment has been the emergence and increased adoption of new financial technologies, the so-called fintech. Fintech solutions address some of the key financial market failures and frictions underlying the challenges in access to finance for SMEs. Box O.1 ­ discusses how fintech may be mitigating some of these challenges. Furthermore, miss- ing markets are a critical challenge in many EMDEs. Policy makers need to consider the unique circumstances of each country and prioritize evidence-based policies that address the challenges of the SME financing ­ gap. A rigorous, data-driven assessment of the key constraints on firm financing and their underlying causes within the context of individual countries is important not only  for the design of policies but also for policy implementation, including the prioritization and sequencing of an appropriate set of public policy interventions. ­ A  data-driven assessment can also enhance the effectiveness of interventions by enabling the implementation of effective monitoring and evaluation frameworks. Analysis of firm financing based on high-quality, granular data can help to enhance the effectiveness of targeted support policies, for example, by allowing an assessment of policy additionality. However, there is a generalized lack of data on firm financing, especially on the vari- ous sources of debt and equity financing for private firms across the developing world. There is a major gap in standardized, accurate, granular, and frequent data on firm financing, especially for smaller private firms. The scope of the empirical analyses in this volume was largely constrained by the availability of firm-level data. For instance, certain chapters focus on a selected set of MICs, instead of a wider sample of low- and Overview5 BOX O.1 Can Fintech Help to Close the Gaps in Firm Financing? A key recent development has been the emergence and increased adoption of new financial ­technologies, the so-called fintech. The more widespread adoption of financial technology (fintech) solutions may be changing the landscape for firm financing, especially debt financing for the smaller firms in a country.a Fintech solutions address some of the key financial market failures and frictions underlying the challenges in access to finance for small and medium enterprises (SMEs). For instance, the use of big data and fintech can mitigate frictions related to information asym- metries by enhancing access to alternative sources of data. Instead of relying on a firm’s credit history or collateral to fill information gaps about its ability to repay its debt, lenders can use data- driven credit scores or access real-time payment data to extend credit to previously underserved firms (such as SMEs). Lenders can also reach firms at lower cost through digital channels. By facili- tating access to finance through “branchless banking,” fintech solutions can improve the outreach to smaller firms in more remote areas, thereby reducing the typically high transaction costs associ- ated with servicing these firms through conventional bank branches. In addition, fintech solutions have the potential to mitigate the high transaction costs of small-transaction finance and concerns about scalability in SME financing by increasing digitalization, automation, and adoption of artifi- cial intelligence. However, fintech solutions are not a panacea. They do not tackle all the constraints on access to finance for underserved firms, and they raise new obstacles that, in many instances, can be constraining, especially in the context of emerging market and developing economies (EMDEs). For example, digital financial services can increase the potential risks associated with data privacy and consumer and investor protection. These services may require new regulatory frameworks and financial infrastructure—such as systems for digital identification and authentication, legal  and regulatory frameworks for data protection and data privacy that adequately address cybersecurity risks, and regulatory frameworks that enable the use of electronic assets for trading or ­collateral, among others. Furthermore, challenges associated with the use of alternative data and automated approaches for credit risk assessments could introduce distortions into lending decisions. For example, there is the potential for discrimination biases (such as gender, race, and geographical location) that arguably have a larger impact on underserved segments. The opacity of the algorithms makes it particularly difficult to address these biases, thus complicating the adoption of safeguards. In EMDEs, where the enabling environment for firm financing is often underdeveloped, these new challenges associated with digital financing for firms could further hinder access. This is ultimately an empirical question left for future research. a. Although expanding, the use of fintech remains relatively limited for the financing of firms in most EMDEs, especially when contrasted to high-income countries. See Didier et al. (2022). middle-income countries, solely because of data availability. Overall, the data gap is especially marked in countries where data are most needed, such as those with less developed financial systems, where financial inefficiencies can be more constraining. Importantly, access to data supports not only the decision-making processes of policy makers (including central banks, regulators, and development institutions) but also those of financial institutions and the private sector at large. 6 Unleashing Productivity through Firm Financing Therefore, improving the availability of and access to data is crucial toward an effec- tive policy agenda. Policy makers should prioritize the collection of and access to more granular and better quality data on firm financing and performance to foster evidence- based policies to tackle the challenges of the SME financing gap. Although several EMDEs have taken important actions to expand their statistical base, stepping-up efforts are still needed to develop and improve the national building blocks for effective and comprehensive data collection, including by using regular firm-level surveys. Overall, the evidence in the volume supports the active engagement of policy ­ akers in addressing size-induced financial market inefficiencies and unlocking the m constraints on SME financing to boost productivity and growth. But how to do so? The policy recommendations that emerge from the analyses highlight that policy makers should take an all-encompassing approach that (1) fosters the enabling and supportive environment for debt and equity financing and (2) considers more targeted approaches to improve access where financing gaps are most severe. Although nontargeted inter- ventions benefit all firms, they tend to benefit the smaller firms in a country dispropor- tionately. In the context of this volume, targeted interventions focus exclusively on SMEs or on a subset of them. Policy Support Needs to Take a Differentiated Approach toward Debt and Equity Financing Financial sector policies aimed at closing the financing gaps for firms in EMDEs must focus on supporting widespread and efficient access to debt financing for SMEs. The estimates show that about 65–85 percent of the misallocation of finance across firms stems from a scale effect—an inefficient allocation of the total amount of finance to firms (figure O.3). Removing financial market inefficiencies to relax the overall level of firms’ financial constraints, while keeping the the debt-equity composition unchanged, could lead to aggregate productivity gains of up to 73 percent in MICs. In practice, debt constitutes the largest and most important source of finance for a vast majority of pri- vate firms in the developing world. Hence, the core focus of policy initiatives aimed at promoting financing for SMEs should be on debt financing. Although in practice debt is a crucial source of financing for SMEs, equity financing can be powerful in promoting innovation. Debt and equity financing play important but distinct roles in supporting firms’ productivity and growth. Equity financing is a more effective way of funding firms with innovative activities. These activities are inherently risky and generally entail investments in intangible assets that provide lim- ited collateral value. Investments in intangible assets could thus be hard to finance with debt, especially when firms lack other sources of collateral. The results suggest that this is indeed the case for firms in EMDEs. Equity but not bond financing is associated with rapid expansion of the productive capabilities of firms with high levels of R&D expen- ditures, especially in terms of intangible assets. A key implication of this result is that Overview7 FIGURE O.3 The Scale Effect Is a Greater Source of Potential Productivity Gains Than the Debt-to-Equity Mix Norway Bosnia and Herzegovina Montenegro Luxembourg Portugal Spain Finland Germany Austria Slovenia Slovak Republic Serbia Hungary Croatia Poland France Italy North Macedonia Bulgaria Czechia Romania Ukraine Estonia Belgium 0 10 20 30 40 50 60 70 80 90 100 Share of reallocation gains (%) Scale Composition Source: Cusolito et al. 2023. Note: The figure shows the counterfactual aggregate TFP gains for each country if the misallocation of finance was reversed under the baseline estimation of the elasticity of substitution between debt and equity and under the alternative scenario of perfect substitut- ability. The gains under perfect substitution are depicted in brown, and the difference between the baseline and perfect substitution, which measures the contribution of the composition effect through the debt-to-equity ratio, is depicted in orange. See chapter 5 in the volume for more details. TFP = total factor productivity. limited access to equity financing can hinder investments in intangibles and distort firms’ investment decisions—for instance, toward safer and liquid but potentially less  profitable and less innovative projects—thereby constraining their productivity and growth. The underdevelopment of equity markets in EMDEs constrains the undertaking of innovative activities, impacting aggregate productivity and growth. The results show that VC financing is skewed toward a narrow set of high-tech sectors, such as the soft- ware industry, whereas PE investments tend to focus on more traditional sectors figure O.4, panel a). These investment patterns suggest that private markets for equity (­ financing have played a limited role in advancing substantial technological change in EMDEs. Indeed, the estimations show that countries with more knowledge- and tech- nology-related outputs, hence an arguably larger share of firms engaging in innovative activities, would benefit the most from improvement in the allocation of capital between 8 Unleashing Productivity through Firm Financing FIGURE O.4  Equity Financing in High-Income Countries and Middle-Income Countries b. Middle-income countries with a larger share of a. VC financing is concentrated in a narrow set innovative firms would reap the most benefits of high-tech sectors from increasing equity finance 90 (55) 50 Global Innovation Index, output component 80 (82,848) (5,023) (5,783) (747) 45 Share of VC financing (%) 70 (18) Czechia Estonia 60 40 Bulgaria 50 35 Hungary Slovak Republic 40 Ukraine 30 Poland 30 Croatia Montenegro Romania 20 25 Serbia 10 North Macedonia 20 0 Bosnia and Herzegovina 15 r) pa llion ing r) m billi cing r) illi ing be be be 15 20 25 30 35 Co $, b anc , b nc s( ) nie ns) s) s m m m n on S$ ina S$ ina nu nu nu o S in Reallocation gains: Share of the composition effect s( s( F (U F (U F i nie nie , (debt-to-equity mix) (%) pa pa (U m m Co Co High income Upper-middle Lower-middle income income Share of companies Share of capital invested Sources: Panel a, Didier and Cheuva 2023; for panel b, calculations based on Cusolito et al. 2023; World Development Indicators; World Intellectual Property Organization. Note: In panel a, the numbers in parentheses show the total number of companies and the total financing amount from VC investments within the top-five sectors (technology, media, and telecom; mobile; software as a service; artificial intelligence and machine learning; and e-commerce). China is excluded from the figure. See chapter 3 in the volume for more details. In panel b, the x-axis shows the share of aggregate total factor productivity gains for each country if the misallocation of finance along the financing mix were reversed. See chapter 5 for more details. VC = venture capital. debt and equity. Countries with more innovative activities could obtain sizable produc- tivity gains from rebalancing the composition of financing to firms and improving their access to equity finance (figure O.4, panel b). These results reinforce the idea that firms’ capital structure matters for aggregate productivity. With a holistic approach, policy can be effective in developing equity markets. A well-rounded approach to developing the overall landscape for equity financing and entrepreneurship and innovation would improve the likelihood of successful interven- tions. The experience of HICs indicates that supporting equity market development is a costly endeavor, often with long lead times, and it requires a long-term commitment to reach sustained impact. Moreover, policy makers need to think of equity market development across its full spectrum—from seed and angel investors to venture capi- talists and private and public markets. Individual segments should not be viewed and supported in isolation, as they would typically have upstream and downstream linkages—for example, earlier market stages can support deal flows to later stages, and ­ analogously, the later stages can be exit options for earlier investors. In addition, the design of government programs to support private equity market development is par- ticularly important, as these plans can affect the program effectiveness. Overview9 In EMDEs, these difficulties can be even more pronounced, as fostering the devel- opment of equity markets entails tackling a complex set of interrelated demand- and supply-side challenges. For example, the results point toward deficiencies in the entre- ­ preneurial environment, as well as in the broader enabling environment for equity financing and the lack of domestic risk ­capital, which are reflected in the underdevelop- ment of the full spectrum of equity markets, including public markets. Policy makers must also be cognizant of the trade-offs in allocating resources to support equity financing versus debt financing, especially when fiscal resources are scarce. There is limited empirical evidence that would help to focus discussions on how debt and equity financing might compete with and/or complement each other as sources of financing for firms in EMDEs. The evidence in this volume highlights a few important considerations. The foremost consideration is that policy makers need to be realistic about both the desirability of policy interventions as well as their feasibility and impact. Carvajal and Didier (2024) highlight that the feasibility and impact of policy support programs depend on individual country contexts. A consideration in this regard is the outreach of different markets. Debt financing is the most important source of financing for firms, and support programs for debt financing can have wide- spread reach. In contrast, programs supporting equity financing typically have limited reach, covering a small set of firms, often in a narrow set of industries. That is the case even in HICs. In other words, equity financing is a viable funding option for a few firms, suggesting that, at least in the near term, debt financing will continue to be the key financing source for SMEs, including innovative firms. The results also suggest that policy interventions to support equity market develop- ment are more likely to succeed when certain preconditions are in place, such as the existence of a strong institutional investor base and supportive entrepreneurial envi- ronment. These conditions are more likely to be observed among the more financially developed MICs, raising questions about the effectiveness of interventions in EMDEs more broadly. However, empirical evidence remains scarce. The targeting of policies is another critical aspect to ensure the effectiveness and impact of policy support on productivity and growth. ­ Research on the effectiveness of specific government policies supporting the financing of innovation and the development of equity markets, especially private markets, remains scarce. For instance, there has been no systematic evaluation of the costs of government intervention in supporting private market development, even in more financially devel- oped MICs. There has also been limited evidence on the shape that government interven- tions should take—for example, the most effective form of ownership structure for government sponsored VC funds. At the core of this lack of research is the lack of data. Although information is typically available for entrepreneurs who have obtained (private and public) equity financing with or without government support, information on the counterfactual, that is, those who did not get equity financing, is often missing. More 10 Unleashing Productivity through Firm Financing research is needed in this area, especially on the effectiveness of interactions among dif- ferent government policies, such as between initiatives supporting the d ­ evelopment of private markets for equity financing and those fostering entrepreneurial activities. Policy Targeting Should Reflect the Larger Financing Gaps for Smaller and Innovative Firms The findings in this volume indicate that, in supporting debt financing, there is a role for financial sector policies that target firms based on their size, which is an effective proxy for financial constraints in EMDEs. For example, the evidence emerging from the years of the COVID-19 pandemic highlights the importance of targeting in govern- ment programs to help firms to cope with shocks. Ex ante targeting the set of financially constrained firms was a complex task when the pandemic hit. Ex post evidence indi- cates that firm size would have constituted an adequate targeting parameter. This is consistent with other analyses in this volume that show that the smaller firms in a country tend to be more financially constrained than the larger ones. Although the size of a firm is a proxy for its financial constraints, the age of the firm is not. For example, the results show that younger firms had roughly similar probabili- ties of being financially constrained as more mature firms during the pandemic, sug- gesting that younger firms were not particularly vulnerable to shocks. In addition, relaxing financial constraints based on firm age does not unequivocally yield positive productivity gains in all countries, thus casting doubt on using firm age as a relevant proxy for policy action. The importance of access to finance for firms at the beginning of their life cycle is a topic that deserves more research. Size-based targeting in financial sector policies should not translate into uncondi- tional support to firms simply based on their size.5 The viability of firms is a critical aspect for policy targeting, for instance, to avoid supporting the proliferation of zombie firms.6 Policies should balance the need for access to finance with the need for financial discipline and accountability. Policies deployed through financial institutions can provide incentives for lenders to do business as usual through their due diligence pro- ­ cesses, assessing firms’ prospects and their capacity to repay in the case of credit ­ providers, and thereby ensuring that capital flows to firms with better prospects. Nonetheless, there could be perverse incentives for both firms and financial institu- tions, which puts a premium on policy design. For example, targeted policies should be carefully designed to avoid creating policy-induced thresholds that distort firms’ incen- tives to grow. Banks may have incentives to push loans to certain segments or regions to meet quotas or lending targets set by the government, which can lead to overlending and high default rates as the loans may not be sustainable or viable for borrowers. Targeted financial sector interventions should aim to address the key financial market failures and frictions underlying the challenges in access to finance for SMEs. ­ Overview11 They often focus on reducing the perceived and real risks associated with debt financ- ing for smaller private firms. One of the core size-induced market failures for debt financing is related to information asymmetries, which tend to increase the (often high) risks of engaging with smaller firms, as lenders are unable to assess their financial viability. In the context of limited information, the lack of assets that can effectively serve as collateral and the limited scalability of lending technologies for smaller firms may further amplify these risks. Hence, targeted interventions should intentionally focus on: (1) improving information on SMEs; (2) “de-risking” SMEs, including scaling up financing to the segment to foster risk diversification; and/or (3) creating missing markets. Examples of such policies include partial credit guarantees, lines of credit, and co-investments. The relative importance of these different markets depends critically on country context. The direct engagement of private capital in a sustainable manner is critical for the development of firm financing in EMDEs. Policy makers should thus place significant emphasis on improving additionality and crowding in private capital, while minimiz- ing distortions and outright avoiding crowding out effects, when designing targeted policies. In this regard, clear graduation criteria are essential for the sustainability and effectiveness of targeted policies. For firms, including SMEs, graduation would entail ensuring that policies aim at a transition toward market-based financing; for financial institutions, it would entail a transition toward commercially viable engagement with targeted segment (for example, SMEs). the ­ Although policy targeting is complex, it is imperative for equity financing, due in large part to the scarcity of this financing source in EMDEs. The lack of a diverse set of options for financing can increase the attractiveness of equity financing for firms seeking to diversify their funding sources. Even though equity can fund any type of investment, it generally disproportionately benefits firms with investments in intan- gible assets, such as small, high-tech, and/or high R&D firms, which often have ­ difficulties in accessing debt financing. Hence, the equity financing gap is most acute for smaller private firms undertaking innovative activities in EMDEs. However, equity is an expensive source of financing, as compared to debt, and entrepreneurs may be reluctant to accept external shareholders, regardless of economic or financial considerations. Furthermore, many start-ups and SMEs are not investment ready— they might not understand what equity investors are looking for or how to “sell” their businesses to potential investors. These weaknesses, in turn, can compromise the effectiveness of supply-side interventions, such as initiatives to develop equity ­markets. While public sector support can be particularly important in the early-stage segments of equity markets, thus addressing the scarcity of funding for smaller firms, the targeting of programs for equity financing should go beyond a size-based approach. That is, the policy agenda must recognize that, for a subset of SMEs—­ notably, innovative ones—a more balanced approach between access to debt and equity financing would be valuable. 12 Unleashing Productivity through Firm Financing A Supportive Enabling Environment Is the Backbone of Firm Financing Financial sector regulators can contribute to improved access to finance for firms by promoting a favorable legal and regulatory environment. Such an environment estab- lishes the rules within which all the financial institutions, financial instruments, and financial markets operate in a given country. Legal and regulatory frameworks are complemented by sound financial infrastructure that improves the efficiency and effec- tiveness of financial intermediation. For example, deficiencies in credit information systems, secure transaction frameworks, and insolvency regimes can hinder the effi- cient functioning of financial systems, even in the presence of an otherwise flawless legal and regulatory framework. It is worth noting upfront that reforms to the enabling environment can take years to develop. Changes in laws and regulations are often just the initial steps in effectively supporting and improving the landscape for firm financ- ing. Effective implementation, including enforcement, is critical. These nontargeted interventions do not focus specifically on a subset of private firms, such as SMEs, but they tend to entail disproportionate benefits for this set of firms. Fostering the enabling environment for debt and equity financing complements more directed interventions. Moreover, Carvajal and Didier (2024) emphasize that the policy agenda to complete the enabling environment supporting firm financing carries very limited fiscal costs, while the benefits could be sizable, especially for SMEs. This is the case for policies aimed at strengthening the financial infrastructure, which typically reduce the information asymmetries and legal uncertainties that increase the risks of SME financing for lenders and investors. Because the challenges of opacity of information and high investment riskiness are severe for the smaller firms in a country, they would benefit the most from such interventions. For example, strengthening credit information systems to expand the coverage and depth of information—for example, by including alternative data such as payment transactions, as well as positive and negative data—would facilitate the flow of information, thereby mitigating information asym- metries and reducing the adverse selection and moral hazard concerns that are typical in SME financing. In effect, the need for physical collateral could be replaced by, or at least supplemented with, reputational collateral. Moreover, increased access to reliable infor- mation could facilitate the adoption of automated screening methods, such as credit scoring models, which would help to address the high transaction costs of lending to SMEs, for example.7 Similarly, effective collateral systems can reduce the risks and losses for lenders. For example, developing secured transaction frameworks that enable the use of movable assets as collateral can foster access to finance for small firms by addressing collateral mismatch between borrowers and lenders. For these firms, movable assets typically account for a large share of their assets. The findings also highlight the importance of effective insolvency systems. These would ensure the existence of robust exit mechanisms to minimize the prevalence of Overview13 zombie firms, thereby reducing the amounts of capital and labor sunk into these firms and facilitating asset reallocation when firms become unproductive.8 Insolvency laws are critical for creating a level playing field that permits nonviable businesses to exit swiftly and predictably, thereby permitting viable businesses to restructure when needed and playing a pivotal role in saving jobs. For example, the estimations show that deficiencies in insolvency systems can distort incentives—for example, by supporting inefficient loan evergreening—that increase the likelihood and prolong the survival of zombie firms. Moreover, the findings show that weak insolvency systems lock up not only capital, but also labor in low productivity uses. To the extent that labor released from exiting firms is absorbed by more productive firms, there could be gains in aggre- gate output. Supporting the enabling environment for a wide range of debt financing options could also help to address the marked financing gaps faced by some firms, including innovative SMEs. Supporting access to finance for SMEs should not be focused on bank loans alone; it can be achieved through a range of financial products (and financial providers). Various debt products can help SMEs to overcome their limited credit his- tory and/or limited ability to pledge collateral—such as asset-based lending, supply chain financing, and cash flow lending. For example, factoring can be an important source of working capital financing for SMEs, whereas leasing can be valuable for investment finance. Policy makers should thus support the legal and regulatory frame- works for this wider set of debt financing products. Access to diversified sources of financing could also help firms to weather shocks. For instance, alternative financing sources might act as a “spare tire” in times of crisis in the banking sector, allowing firms to mitigate the effects of a crisis on their performance. Furthermore, the development of these markets can be important for firms undertaking innovative activities and/or investing in intangible assets, as many of these firms have limited tangible assets to offer as collateral for bank financing. Policy makers could also foster the use of intangible assets as collateral in debt financing, as the evidence points to significant challenges in this area.9 However, there is limited evidence on the effectiveness of specific policies supporting intangible collateralization in the context of EMDEs, which calls for more research on this topic. Conclusions Overall, the various analyses in this volume point to size-related inefficiencies in finan- cial markets in EMDEs that render smaller firms more financially constrained than larger firms. The results show that relaxing these financial constraints on smaller firms—for instance, through policy action that mitigates these inefficiencies in ­ financial markets—would allow them to realize better expected growth opportunities, thereby resulting in large productivity gains. 14 Unleashing Productivity through Firm Financing The original findings in this volume have important implications for a range of financial sector policy interventions aimed at addressing the financing gaps for firms in EMDEs. The findings also provide strong analytical underpinnings for existing, practi- cal knowledge in supporting SME financing. Furthermore, the exploration of novel databases sheds new light on long-standing challenges that are relevant for policy ­ makers: how inefficiencies in financial markets constrain private firms in EMDEs, how these inefficiencies vary across firms of different sizes and ages, and the impact of finan- cial constraints on growth and productivity. The volume also reveals, for the first time, the relevance of the composition of financing sources—namely, debt versus equity—for the productivity and growth of firms in EMDEs. Nonetheless, there is still a lot to be learned about the relative merits of various sources of financing for firms and their potential complementarities, the relevance and effectiveness of specific policy interventions to address critical financing gaps, and the impact of the misallocation of finance on the productive growth of firms.10 The volume thus concludes with a call for more research on these issues. Notes 1. The evidence in the volume is based on several complementary data sets with different samples of firms and countries. The core of the empirical evidence in this volume focuses on firms not listed in public stock exchanges, referred to as “private firms” throughout the volume. However, some analyses focus on publicly listed firms only or a combination of both. Similarly, some of the analy- ses have greater coverage of MICs in Europe, whereas others cover a wider sample of EMDEs. The volume clearly specifies the sampling of firms and/or countries for the analysis. 2. Throughout this volume, EMDEs comprise middle-income and low-income countries. 3. Building on Cusolito and Maloney (2018), chapter 1 in the volume provides a stylized conceptual framework linking access to finance, firms’ productive growth, and aggregate outcomes, such as growth and productivity. 4. This overview refers to “smaller” and “larger” firms in the relative sense, and these terms are not tied to specific numbers of employees unless indicated otherwise. 5. In this volume, targeted interventions are defined as public interventions that aim directly to affect the supply of financing available to firms and that carry fiscal costs. There is, however, no globally accepted typology of targeted interventions. 6. Zombie firms are firms that can stay afloat despite being unable to pay off their debt obligations and being unable to remain profitable in the long term. These firms typically have low productiv- ity and are heavily indebted. 7. See, for example, World Bank (2019) for a more detailed discission on developing information systems in EMDEs. 8. World Bank (2021) provides specific recommendations for the design of bankruptcy regimes for micro and small enterprises. See also Muro and Castagnola (2023). 9. Research in this area indicates that there are difficulties in valuing intangible assets and realizing their attributed value due to their limited liquidity and costly redeployment, which render them a riskier and less valuable form of collateral. 10. Drawing insights from the experience of both HICs and EMDEs, Carvajal and Didier (2024) discuss how governments can enhance the effectiveness of their policies supporting SME access to finance. Overview15 References Carvajal, A. F., and T. Didier. 2024. “Boosting SME Finance for Growth: The Case for More Effective Support Policies.” World Bank, Washington, DC. Cusolito, A. P., and T. Didier. 2022. “World Bank Orbis Database: Methodology and Users’ Guide for Cleaning Financial and Ownership Modules.” World Bank, Washington, DC. Cusolito, A. P., R. N. Fattal-Jaef, D. S. Mare, and A. V. Singh. 2023. “From Financing to Real Misallocation: Evidence from a Global Sample.” Background paper for this volume. World Bank, Washington, DC. Cusolito, A. P., and W. F. Maloney. 2018. Productivity Revisited: Shifting Paradigms in Analysis and Policy. Washington, DC: World Bank. Didier, T., and B. Cheuva. 2023. “Private Markets for Equity Financing in Developing Countries.” Background paper for this volume. World Bank, Washington, DC. Didier, T., E. Feyen, R. Llovett-Montanes, and O. Ardic. 2022. “Global Patterns of Fintech Activity and Enabling Factors: Fintech and the Future of Finance Flagship Technical Note.” World Bank, Washington, DC. Didier, T., R. Levine, R. Llovet Montanes, and S. L. Schmukler. 2021. “Capital Market Financing and Firm Growth.” Journal of International Money and Finance 118: 102459. Farazi, S., and J. E. Lopez-Cordova. 2023. “Financial Constraints, Firm Performance, and Policy Support during the COVID-19 Pandemic.” Background paper for this volume. World Bank, Washington, DC. Muro, S., and A. Castagnola. 2023. “Insolvency Systems and Zombie Firm Proliferation in High- and Middle-Income Economies.” Background paper for this volume. World Bank, Washington, DC. World Bank. 2019. “Credit Reporting Knowledge Guide 2019.” World Bank, Washington, DC. World Bank. 2021. “Principles for Effective Insolvency and Creditor/Debtor Regimes.” World Bank, Washington, DC. 16 Unleashing Productivity through Firm Financing ECO-AUDIT Environmental Benefits Statement The World Bank Group is committed to reducing its environmental foot- print. In support of this commitment, we leverage electronic publishing options and print-on-demand technology, which is located in regional hubs worldwide. Together, these initiatives enable print runs to be lowered and shipping distances decreased, resulting in reduced paper consumption, chemical use, greenhouse gas emissions, and waste. We follow the recommended standards for paper use set by the Green Press Initiative. The majority of our books are printed on Forest Stewardship Council (FSC)–certified paper, with nearly all containing 50–100 percent recycled content. The recycled fiber in our book paper is either unbleached or bleached using totally chlorine-free (TCF), processed chlorine–free (PCF), or enhanced elemental ­ chlorine–free (EECF) processes. More information about the Bank’s environmental philosophy can be found at http://www.worldbank.org/corporateresponsibility. The ability of firms to finance investments in physical and human capital and innovate through digital, green, and other technologies is central to productivity and economic growth. Yet a myriad of distortions and frictions can prevent the efficient allocation of financial resources to firms, negatively impacting their growth and productivity. Drawing from a newly constructed Orbis data set for 2.5 million private firms, Unleashing Productivity through Firm Financing shows that misallocation of finance stifles aggregate productivity. This volume focuses on the links among firm financing, financial constraints, and firm performance, using comprehensive and underexploited firm-level data for emerging market and developing economies. This work explores both the effects of firms’ access to finance and the composition of finance (equity versus debt) on firm performance. It also provides a novel, quantitative assessment of the extent of constraints in debt and equity financing for private firms of different sizes and the impact of such constraints on aggregate growth and productivity. The findings provide robust analytical underpinnings for existing, practical knowledge in supporting access to finance for small and medium-sized enterprises in emerging market and developing economies. SKU 33646