Firm performance under financial constraints: evidence from sub-Saharan African countries

Abstract The business environment in which a firm operates has an important impact on firm performance. This study examined the impact of credit constraint and power outages on the firm’s investment decision using World Bank Enterprise Survey (WBES) data collected from firms operating in 13 sub-Saharan Africa (SSA) countries. The study employed a two-part model and the Heckman selection model to estimate the impact of lack of access to finance and poor power supply on a firm’s decision to invest in self-generation. The result obtained suggest that there is a negative correlation between credit constraint and a firm’s decision to invest in self-generation. This indicates that credit constraint negatively affects a firm’s decision to invest in self-generation and firms that are credit constrained have less incentive to invest in self-generation compared to those that are not credit constrained. To test the robustness of the result obtained, alternative definitions of credit constraints were used. Results from alternative regressions using different definitions of credit constraints show that credit constraint affects a firm’s decision to invest in self-generation but not the volume of investment.