Financial constraints, corruption, and SME growth in transition economies

In this study, I investigate the impact of firm-level financial constraints and corruption in the business environment on growth for over 10,000 small- and medium-sized enterprises (SMEs) in 28 Eastern European and Central Asian countries. I also examine the determinants of firms' financial constraints and the relevant role of country-level development, institutions, and corruption. I find that financial constraints negatively affect both firm sales growth and employment growth while corruption has no direct impact on growth. Older, larger, foreign-owned firms and firms with higher ownership concentration report lower financial constraints while exporting firms report higher financial constraints. In countries with higher levels of GDP per capita, stock market development, legal systems and property rights, and lower levels of corruption, firms face lower levels of financial constraints. I provide novel empirical evidence that firm-level corruption hinders SMEs' access to financing and seriously hampers their growth in transition economies. (C) 2019 Board of Trustees of the University of Illinois. Published by Elsevier Inc. All rights reserved.