MPFD Working Paper on Financing Structure, Micro and Small Enterprises’ Performance, and Woman Entrepreneurship in Indonesia

Working paper29 Sep 2020

Access to finance has been found crucial in influencing firms’ real activities and economic performance. This paper investigates the relationship between the financing structure and firm performance by exploring a unique panel dataset of 59,968 Micro and Small Enterprises (MSEs) operating in the manufacturing sector in Indonesia over the 2010-2015 period. We collected a rich set of information about source of loans to assess the firm performance using yearly total factor productivity (TFP) and labor productivity of each firm. We then examined whether more financing options available to women entrepreneurship improves firm performance. Our results show that financial factors are highly decisive to firms’ TFP and labor productivity. The MSEs which have access to external formal financing directly improves productivity at the firm level. Moreover, the study finds a significant underperformance of firms owned by women entrepreneurs compared to those owned by men entrepreneurs. Nevertheless, we found that women entrepreneurs who have access to formal financing improve their firm’s performance. The effects of finance on productivity are also linked to the firm’s ownership, education, size and age. Our results are robust as demonstrated through the use of different approaches. These results provide support for policymakers to alleviate credit constraints to enhance productivity of micro and small enterprises and especially woman entrepreneurship in Indonesia.