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 A frican countries, I show supplier credit is positively correlated with capa city utilization; the result continues to hold when credit access is instru mented using supplier characteristics. I claim that this is because firms l acking credit likely face inventory shortages, leading to lower rates of ca pacity utilization. This explanation yields several Further predictions tha t are supported by the data: there is a positive relationship between suppl ier 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.