Investing Into Their People-The Role of Credit Constraints on Firms' Human Capital Investment in Emerging Market Economies
Andreas, Kern T
In today's rapid changing market, a well-trained work force is the key to provide firms with a competitive edge through incorporation of productivity and creativity. However, in emerging market economies, the provision of on-the-job training varies greatly across firms. Drawing on a standardized data set from the World Enterprise Survey for 7467 manufacturing firms in 9 emerging market economies and using probit models, this paper explores how financial constraints affect investment in human capital. Specifically, the paper presents evidence that a financially constrained firm has approximately a 14 percent lower probability of offering training to its work force compared with a non-constrained firm. In addition, credit constraints seem to matter more for private SMEs. Since inefficient firms may overstate the negative effect of credit constraints on their operations, a proxy variable to measure the degree of the political connectedness of the firm is used as an instrumental variable for credit constraints. My thesis findings suggest that improving the overall business environment and financial institutions would be a key measure to facilitate the growth of firms and that government should make it a long-term policy priority to expand access to education.
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