This project focusses on the role of financial constraints in determining the lack of transition of firms from the very small family firms (OAMEs) which are the predominant type of firms in the informal sector to the larger firms that employ non-family labour (DMEs and NDMEs). The unit level analysis is supplemented with panel data analysis of 364 districts over the period 1995-2010, where the effects of financial development on firm transition at the district level are estimated. The results suggest that financial constraints play an important role in firm transition from OAMEs to NDMEs, and then to DMEs. However, finance constraints seem to matter more for the NDME-DME transition than the OAME-NDME transition. Firm capabilities seem to matter significantly too, for example, firms which maintain accounts are twice as likely to make the transition versus firms which do not. Access to electricity, the firm’s location in urban areas, and whether the firm has experienced an expansion in its operations previously matter greatly in firm growth.

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