Credit Frictions and Entrepreneurial Talent Misallocation
Financial market barriers prevent highly skilled prospective managers without personal wealth from securing startup loans, preventing talented entrants from competing against and replacing inefficient incumbent firms.
Picture this
Think of an extraordinarily skilled chef who has zero savings and cannot secure a bank loan to buy kitchen stoves, while an incompetent chef inherited a fully-equipped restaurant; because the skilled chef cannot open a competing business, the bad restaurant stays open indefinitely.
What the evidence says
Financial constraints block low-capital individuals with superior managerial talent from starting new enterprises, suppressing industry productivity growth by choking off competitive reallocation.
- Who
- Synthesis of cross-country firm dynamics in developing economies including India, China, and Sri Lanka.
- How
- Theoretical modeling verified by empirical cross-country enterprise and credit-access literature.
What to do
Establish credit assessment frameworks based on verified managerial competency and business plans rather than physical asset collateral alone.
From the source
"Second, even if financing is not such a constraint for existing (large) firms, financing obstacles are likely to limit the extent to which individuals with better managerial talent, but low capital, can start and grow enterprises to compete with badly managed firms."
Why Do Firms in Developing Countries Have Low Productivity?
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