Business Constraints and Firm Exit in Developing Countries: Evidence from Nigeria

Abstract

This study examines the impact of business constraints on firm exit using harmonized dataset of panel firms from the World Bank Enterprise Survey in Nigeria. It applies a confirmatory methodology – factor analysis to aggregate 15 firm-level indicators of business constraints into an index scale and estimates firm likelihood of exit from the market using binary probit model. Findings suggest that firm exit in Nigeria is not determined by current level of constraints in the business environment; however, additional level of constraints will result to more firms exiting the market. This finding holds true in the entire model specifications; that is, with and without accounting for firms’ differences or demographics, the squared business constraint index has a significant positive association with firm exit. By implication, addressing constraints in the business environment can improve business survival prospect and in return contribute to national development. Therefore, it is imperative that policymakers in developing countries like Nigeria should gear more efforts towards improving business environment in their economies through carefully designed policies that can foster private sector development.