Social capital, institutions, and financing constraints: International evidence

Abstract

The study utilizes firm-level data from the World Bank’s Enterprise Surveys to investigate the impact of institutionalized social capital on financing constraints faced by firms across various sizes and sectors in 138 medium- and low-income countries. Financing constraints are assessed through survey-based indicators of firms' decisions regarding external financing. Social capital is measured using a novel composite index that incorporates country-level measures of civic activism, intergroup cohesion, interpersonal trust, membership in clubs and associations, and gender equality. Controls include firm-level characteristics and national economic and institutional factors. Results indicate that higher values of the social capital index correlate with reduced financing constraints across various sectors and regions. These findings remain robust even after accounting for potential endogeneity bias. Firm-specific characteristics emerge as significant predictors that moderate the relationship between social capital and financing constraints. Notably, economic and financial development, governance quality, contractual institutions, and social and religious conditions play significant roles in attenuating the impact of social capital on financing constraints across different countries.

Keywords Emerging markets; External finance; Financing constraints; Institutions; Social capital; Trust