Financial Constraint, Entrepreneurship and Sectoral Migrations: Evidence from Madagascar

P. Baraton, F. Léon | MFW4A

Using an original database of over 3,000 micro and small enterprises (MSMEs) that were microfinance institution (MFI) clients in Madagascar over the period of 2008-2014, the authors observe that around one third of these entrepreneurs changed business sectors in the first five years after starting their business. They find that the probability of an entrepreneur's changing sectors is highly correlated with the size of the first loan obtained from the MFI. This result survives multiple robustness checks, including treatment for endogeneity and attrition. The authors interpret this finding in terms of financial contraint: a lack of financing prevents an entrepreneur from initially investing in their first choice sector, causing them to change sectors only when they have become financially able to do so. This result challenges the classic distinction made between "necessity entrepreneurs" and "opportunity entrepreneurs" and raise important questions concerning entrepreneurial talent allocation.

Madagascar, Access to Finance, SME Finance & Leasing
Year of publication:
File size:
5246169 bytes