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Determinants of Profit Reinvestment by Small Businesses in Emerging Economies

Authors

  • Sugato Chakravarty,

    1. Sugato Chakravarty is a Professor of Consumer Economics in the College of Health and Human Sciences at Purdue University in West Lafayette, IN.
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  • Meifang Xiang

    1. Meifang Xiang is an Assistant Professor of Accounting in the College of Business and Economics at the University of Wisconsin-Whitewater in Whitewater, WI.
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  • The authors wish to thank an anonymous referee and Bill Christie (Editor), for their extensive comments and suggestions leading to a significant improvement in the content and exposition of the paper. We thank the seminar participants at Purdue University, participants at the Hawaii International Conference on Business, John Burr, Chen Chih-Hsiang, Rebel Cole, Richard Feinberg, Chong Gu, Mariya Pylypiv, Leann Rutherford, Abu Zafar Shahriar, and Richard Widdows for their comments and suggestions. We also thank John Nasir of the World Bank for providing us the data and helping us to understand its nuances. The usual disclaimer applies.

Abstract

We investigate the cross-country key factors of profit reinvestment decisions using data compiled by the World Bank from over 7,000 businesses in 36 developing countries. We find that, compared to the security of property rights, it is a firm's access to external financing that plays an important role in a firm's reinvestment decision in emerging economies. The extent of private ownership and the firm's competitiveness are additional significant factors correlated with its reinvestment decision. Furthermore, we uncover a firm size effect in that the above factors driving firm reinvestment decisions appears to impact small firms more than relatively larger firms.

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