What Blocks MENA Firms From Growing? A Bank Al-Maghrib Study Responds
Marrakech – A new working paper published this month by Bank Al-Maghrib (BAM) has identified political instability, limited access to finance, and informal competition as the three binding constraints holding back firm growth across the Middle East and North Africa, including Morocco.
The study, authored by central bank researchers Hicham Doghmi and Kamal Lahlou, analyzed firm-level data from the World Bank Enterprise Surveys covering 18,697 formal firms across 11 MENA countries surveyed between 2010 and 2024. Morocco contributed 1,860 firm observations across three survey rounds in 2013, 2019, and 2023.
Among the paper’s central findings, firms in the region recorded average annual employment growth of 3.5% but saw sales decline by 5.5% per year, reflecting what the authors described as “the challenging economic conditions faced by firms in developing countries.”
Moroccan firms, however, outperformed the regional average on both metrics, posting 7.4% annual employment growth and 9.2% sales growth.
The researchers examined 12 business environment obstacles that firms reported as constraints on their operations. Nearly half of all surveyed firms – 47.5% – cited political instability as a major or very severe obstacle, while 44% flagged corruption and 24.1% pointed to access to finance.
When all obstacles were tested simultaneously, only three proved statistically significant: political instability reduced employment growth by 1.88 percentage points, access to finance constraints cut it by roughly 1 percentage point, and informal competition lowered it by 0.77 percentage points.
Small firms, which constitute 67% of the sample, bore the brunt of these constraints. The study documented that smaller enterprises are “significantly more vulnerable” to both political instability and financing barriers than their larger counterparts. Large and medium-sized firms proved better insulated from all three binding constraints.
Access to formal bank financing emerged as a strong growth driver. Firms with a credit line or loan achieved 1.09 percentage points higher employment growth and 1.68 percentage points higher sales growth than those without. Overdraft facilities yielded even larger gains – 1.86 percentage points for employment and 3.35 percentage points for sales.
Yet financial inclusion remains strikingly low: only 13% of firms in the sample held a loan or credit line, and just 24% had access to an overdraft facility.
Informal financing sources, meanwhile, dragged performance down. Firms relying on owners’ personal loans experienced 1.8 percentage points lower employment growth, while trade credit was associated with weaker sales performance. The paper concluded that informal finance “plays a consistently limited or adverse role in shaping firm growth.”
The size-growth relationship is far from straightforward
A distinctive contribution of the research lies in its examination of how these constraints operate. Using an instrumental variables strategy to address reverse causality, the authors demonstrated that political instability and financing barriers erode firms’ technological capabilities.
Constrained firms were 4.5 percentage points less likely to invest in R&D, 4.7 percentage points less likely to export, and up to 20 percentage points less likely to innovate. These weakened capabilities, in turn, dampened growth potential.
On the positive side, firms that invested in physical capital, R&D, workforce training, and digital tools consistently achieved stronger growth. Exporters recorded 2.5 percentage points higher employment growth, while firms offering formal training programs gained 2 percentage points.
The study also uncovered a notable nonlinear relationship between firm size and employment growth. While smaller firms generally expand faster than larger ones, this negative effect diminishes as firms grow and reverses entirely at a threshold of 275 permanent full-time employees.
Beyond that point, larger firms actually generate faster employment growth. Younger firms also grew substantially more rapidly than older ones, consistent with the economic theory that new entrants must scale quickly to reach minimum efficient cost levels or exit the market.
Firms affiliated with a larger parent company posted 0.76 percentage points higher employment growth, while foreign-owned firms recorded 2.4 percentage points stronger sales performance than domestically owned counterparts.
At the country level, the researchers found that macroeconomic stability and institutional quality matter considerably. Firms operating in economies with lower inflation, higher GDP growth, and larger populations achieved stronger performance. Sound governance, flexible labor regulations, reduced bureaucratic costs, and impartial public administration all correlated positively with firm expansion.
The paper also revealed that broader financial inclusion within a firm’s geographic area and sector benefits individual firms – a 10-percentage-point increase in the share of firms holding loans in the same area-sector cell raised employment growth by 0.37 percentage points and sales growth by 0.54 percentage points, suggesting spillover effects from wider access to banking services.
The authors called for a “comprehensive policy response” that strengthens governance, reduces bureaucratic burdens, preserves macroeconomic stability, and dismantles barriers disconnecting firms from the formal financial system. They urged targeted financial instruments to de-risk innovation and expanded investment in human capital – measures they argued would unlock the technological capabilities essential for sustained private sector expansion across the region.
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