Young and innovative companies in low and middle income countries grow faster when they rely on equity instead of accumulating debt. This is one of the key findings shared by Cesaire Assah Meh, co-editor of the World Bank book Financing Firm Growth: The Role of Capital Markets in Low- and Middle-Income Countries, during a presentation at a World Bank Group seminar.
Assah Meh said the evidence shows that equity financing is better suited for firms aiming to scale, particularly those operating in sectors where investment returns are highly uncertain.
Equity Beats Debt for Risky, High-Growth Investments
The study notes that many of the most promising opportunities for emerging market firms involve building intangible assets such as research and development, technology, and software. These assets have limited collateral value, making them difficult to finance with traditional bank lending.
Equity works differently. It does not require collateral, and investors benefit only when the company succeeds. This makes it a natural fit for young, innovative firms pursuing growth opportunities. Research from advanced economies shows that high-tech firms finance nearly all R&D through internal equity or public equity offerings.
Debt Can Slow Down Expansion
While debt remains an important financing tool, the report warns that excessive borrowing can restrict a company’s ability to expand. Large interest payments reduce cash available for new investments, and high leverage can discourage firms from taking advantage of new opportunities.
The book points out that the surge in corporate borrowing across emerging markets after the global financial crisis often resulted in weaker financial performance. Firms issued more bonds, leverage increased, and flexibility declined.
Assah Meh noted that for firms facing opaque information environments, uncertain returns and limited collateral, debt becomes a poor substitute for equity.
Domestic Capital Markets Deliver the Biggest Productivity Gains
The book documents extensive activity in both domestic and offshore capital markets. However, the strongest improvements in performance were observed among smaller, more financially constrained firms that gained access to domestic markets.
Raising capital through local markets is closely linked to productivity gains at the firm level and contributes to broader gains in aggregate productivity. Equity issuance, in particular, showed the strongest correlation with growth.
Offshore Markets Still Matter but Only for the Few
The research acknowledges the advantages of offshore markets. Firms that access these markets can tap into a wider investor base, secure better pricing and manage currency risks more effectively. But high entry costs and information barriers often keep smaller firms out.
The study notes that more work is needed to understand how firms deploy proceeds raised internationally, whether toward investment, expansion or refinancing.
A Clear Message for Policymakers and Entrepreneurs
Assah Meh’s presentation underscores the importance of deepening domestic capital markets to support firm expansion and boost productivity across developing economies.
For entrepreneurs, the message is straightforward. Growth is easier to achieve when firms avoid overreliance on debt. Equity, whether from investors, retained earnings or public markets, provides the flexibility needed to innovate and scale.
