Credit, Labor Formality and Firm Size: Analytical Framework and Regional Evidence in the Context of the IDB's Country Strategy Dialogue

This work summarizes the results from a series of papers prepared within the framework of the project "Credit, Formalization, and Firm Growth." Those papers were prepared to help inform the overall policy dialogue and the IDB's technical assistance work with its borrowing members, particularly in regard to financing the lending programs of small and medium enterprises (SMEs). The main results can be summarized as follows: i) a positive association between formality and credit conditions in the region appears to be empirically relevant but dependent on idiosyncratic conditions and unevenly distributed conditional on firm size; ii) the positive associations between credit conditions and other measures of firm performance (such as size, growth, and investment) appear to be heterogeneous conditional on firm size; and iii) the empirical assessment of the links between formal credit and the various measures of firm performance may benefit from considering alternative sources of funding such as internal funds.