Trade credit and productive efficiency in developing countries

In developing countries, credit shortages are often so severe as to impact a firm's day-to-day production decisions. Using firm-level data from five African countries, I show supplier credit is positively correlated with capacity utilization; the result continues to hold when credit access is instrumented using supplier characteristics. I claim that this is because firms lacking credit likely face inventory shortages, leading to lower rates of capacity utilization. This explanation yields several Further predictions that are supported by the data: there is a positive relationship between supplier credit and inventory holdings; moreover, raw materials "stockouts" are positively correlated with capacity utilization, particularly in "inventory-intensive" industries. (C) 2001 Elsevier Science Ltd. All rights reserved.