Family ties, institutions and financing constraints in developing countries

Abstract

The paper uses firm-level data from the World Bank's Enterprise Surveys to explore the impact of the strength of family ties on the individual firms’ financing constraints in 138 developing countries. Financing constraints reflect survey-based perceptions of firms regarding access to finance. The strength of family ties expresses the degree of connection among kin and family and affect the firms’ choice between formal and informal finance. However, family finance is associated with benefits and shadow costs and reflects social preferences. The results show that stronger family ties are associated with higher financing constraints of firms in developing countries, but also appear to exert beneficial effects on financing constraints in smaller countries with smaller firms and in countries with high population density. The results remain broadly robust against various types of sensitivity testing and a country's macroeconomic conditions and its institutional and social environment affect them.