External Finance and Labor Productivity in Laos: Impacts and Mechanisms

Abstract

Small and medium-sized enterprises (SMEs) are crucial for a country's growth and development, yet many face challenges in expanding due to limited access to finance. This study investigates the impact of access to external finance on firms’ labor productivity using data from the World Bank Enterprise Survey of Laos (2009-2018). Employing a novel double-lasso regression approach, this study confirms the positive effect of access to finance on SMEs' labor productivity. However, this effect diminishes as firms grow larger in size. Notably, the double-lasso regression simultaneously determines key factors influencing access to finance, highlighting security payments as a previously overlooked determinant. Moreover, investment in worker training is found to be a key mechanism for boosting firms’ labor productivity.