ABSTRACT
This study aimed at finding the effect of financial access on the employment levels of firms in Ghana. It further establishes some basic factors that determine various firms’ financial access. The study used a firm-level survey of 720 firms, which was conducted by the World Bank in Ghana in 2013. Employment growth levels of firms was estimated and regressed using the Two- Stage Least Square (2sls), on several firm level characteristics including financial access. The result indicated that access to cost-effective line of credit/loan or an overdraft facility has positive and statistically significant effect on firms’ employment growth levels. \
Using firms’ age, size, location and other control level variables, the study found foreign ownership and firm size to be positively related to firms’ employment levels whilst firms’ age and location had insignificant effects on firms’ employment levels. These findings are consistent previous studies.
The probit estimation technique was further used by the study to establish some of the key factors that influences the financial accessibility of firms in Ghana. It was revealed that firms’ innovation, availability of an audited financial record as well as firms’ location, all significantly determinants of whether a firm will have access to finance or not.
In the light of this, the study therefore suggests that credit constraints should be significantly relaxed to help curb the high unemployment level, starting with the government lessening its policy rate. In addition, firms should acquire internationally recognized quality certification and take part in exporting of their products as well as allowing foreign partnerships on their shareholding structure.
CHAPTER ONE INTRODUCTION
Background of the study
The relationship between financial growth and economic development has been extensively studied in literature over the years. There exists an extensive consensus from most findings that financial growth results in an increment in economic development through the productivity of firms and the general wellbeing of households. Much empirical evidence (World Bank, 2008; Beck & Laeven, 2006; King & Levine, 1993; Schumpeter, 1911) has documented this fact. However, the direct relationship between financial access and employment is ambiguous, because increasing access to finance will not directly lead to employing additional workers. Increasing investment could expand firms and thus output from a better financial access without even increasing labour, a case of “jobless growth” (Ayyagari et al., 2016).
In addition, the financial growth effect on labour markets has received increasing attention in the recent literature, particularly since unemployment has become a dominant problem for governments of various countries in the world due to the global financial crisis (Garmaise, 2008). Most empirical studies estimate the impact of financial access on employment by comparing the labour market conditions before and after financial regulation changes.
However, some studies argue that constraints in the financial sector should not directly affect labour; this is because unlike capital, labour does not entail financing. Other theoretical literature on the linkages between the capital and labour market suggest that since labour has a fixed cost component, it entails direct financing to take care of the upfront costs that comes with the training and hiring (Ayyagari et al., 2016). Therefore, we should presume that the credit market has an impact on employment decision and thus better access to finance may permit firms to
employ more workers. This may also encourage firms to invest in more capital, hence, directly translate into greater job creation. In some cases, in which firms uses a production technology with capital and labour being substitutable, an increment in capital investment may reduce firms’ level of employment, lowering job creation. The net effect may therefore, depend on firm level characteristics and production structure (Dao et al., 2017). While better financial access may permit firms to hire additional labour, it also encourages firms to invest in more capital, which may not automatically translate into greater job creation.
Furthermore, the size of a firm influences the finance-employment relationship greatly and indeed several empirical studies have found that firms with different sizes may face different operational and institutional constraints (Oi, 1983). More to the point, small and medium-sized enterprises (SMEs) are adversely affected more by financial, institutional and legal obstacles and may have a larger undesirable impact on their development, especially in countries with underdeveloped financial systems (Beck et al, 2005). Deficiency in access to credit remains a major obstacle for many firms, especially SMEs (Baah-Nuakoh, 2003; Osei-Assibey, 2014). In addition, since small firms are more labour intensive as compared to the large ones, the expected finance-employment connection is stronger than it is for larger firms. Ayyagari et al. (2016) shows that, increase in supply of credit results in higher employment growth especially among small firms in developing countries.
Generally, financial access is the process whereby financial products are easily made available to firms in a cost-effective manner. In the finance for all report by the World Bank (2008), three main ways were postulated by which finance, more specifically external finance can influence firms’ productivity and growth; easy financial access aids most firms to be inventive. Also, financial access permits firms to gain the benefits of economies of scale and it helps firms to
acquire extra investment opportunities. Lastly, with easy financial access, firms are able to obtain more effective productive asset portfolio resulting in the opening of more investment doors. Chen et al (2011) also argued that, efficient functioning of the financial markets leads to easy and cheap loans to firms for innovative projects.
Getting access to finance is an undeniably important factor for a firm’s efficiency and growth. Over the years, Ghana has been experiencing higher levels of unemployment, with the unemployment rate increasing to 5.77 percent in 2016 from 5.54 percent in 2015 (Ghana Employment Report, 2015). Past and present policy makers have implemented policies and programmes including the recent National Youth Employment Program aimed at curtailing these higher unemployment levels. The three main sectors of the economy are able to absorb just a few of the unemployed with the agriculture dominating and employing more than half of the labour force until recent times. According to the September, 2015 Ghana Employment Report of the Ghana Statistical Service, the manufacturing and service sector absorbs 14.4 percent and 40.9 percent of the labour force respectively as compared to the 44.7 percent absorbed by the agricultural sector. The lower employment levels of the industry and service sector can be attributed to various reasons.
Finance, plays a vital role in the day-to-day activities of these sectors and cannot be left out. It also serves as a catalyst that encourages the survival and growth of firms located in countries world wild. Whereas new firms require credit as a start-up capital, existing firms also use credit as a source of working capital and investment. Indeed, every business enterprise sees credit as its life-blood (Masood, R. Z., 2011). However, World Bank (2008) and International Finance Corporation (2013) reports provides evidence that most firms are significantly constrained by lack of financial access especially in Africa. Firms require capital for their operations in buying
assets, paying employees’ remuneration, as well as covering operational costs. Improved access to credit helps firms to build their productive capacity and makes them competitive in both the local and the global market (UNCTAD, 2002)
Literature however, informs us that most firms especially those in countries that are less developed, lack easy access to financial services and products and are highly financially constrained ( Ayyagari et al., 2016).Also, firms with greater access to finance have higher Total Factor Productivity than those with no access (Goedhuys et al., 2006).This has undoubtedly led to stunted growth and non-competitiveness of these firms in world trade.
Establishing a direct effect of financial access on employment growth is complex, since the variables that determine a firm’s financial access may also reflect its labor demand. The precise channel through which finance operates is still quite unclear and a better understanding of the connection between firms access to finance and their employment levels will go a long way to help the government initiate policies aimed at increasing their access and thereby their employment levels.
Statement of the Problem
Several empirical literature have established that expansion in the financial sector leads to economic development through the productivity of firms as well as the general wellbeing of households. Contrary to the above, most firms are severely constrained in their access to finance both in developed and under developed economies (Aryeetey et al., (1994), Baah-Nuakoh, 2003). Levine (2005) proposes that, financial access may have an effect on investment decision, savings rate and technological innovation. Levine also states that “We are far from definite answers to these questions: Does finance cause growth, and if it does, how?” One of the possible ways
through which finance can affect the development of firms is through the expansion of its productivity and indeed numerous models provide theoretical validation to this proposition.
However, this study will seek to investigate the causal relationship between access to finance and firms’ employment levels and find out whether financial development will make firms employ more. This generally depends on the type of firm input, thus, labour intensive firms are more likely to employ more as compared to capital-intensive firms when there is financial development. This study will also establish some of the key factors that determines a firm’s success in accessing credit from various financial institutions in Ghana and show how different sectors of the economy differ in their employment levels as a result of the increment in access to credit. It would be established as to whether industry or service sector employs more. The study will compare and contrast the employment level of each sector to get a better understanding as to which sector really get a greater share in terms absorption of the labour force.
It is imperative to study this relationship and more especially within Ghana’s economy because empirical evidence suggest that financing constraints are often found to have the largest undesirable impact on firms’ growth, especially in countries with underdeveloped financial systems. As noted by Mensah (2004), there is no readily available data regarding the exact number of Small and Medium Enterprises (SMEs), but the Registrar General’s Department approximates 90 percent.
