Obstacles to SME growth in Peru: An empirical analysis of the effect of labor constraints on firm performance

Several studies have shown that access to finance is critical for firm growth, but scant research has demonstrated the impact of human capital constraints on firm performance. This study analyzes the impact of labor constraints on firm growth with an emphasis on small and medium size enterprises (SMEs). In Peru, SMEs play a critical role in the economy, accounting for nearly all businesses and employing over half of the active working population. According to the 2010 World Bank Enterprise Surveys, over one-third of all Peruvian firms cite an inadequately trained workforce as the major obstacle to growth. Using OLS regression analyses, this study investigates how human capital constraints affect firm performance and whether these effects vary by firm size. The findings of this analysis indicate the importance of looking beyond credit constraints to help fuel small business growth in developing countries. Complex labor regulations are found to have a negative impact on firm growth, with a larger effect on small businesses. These results have important policy implications for incentivizing governments to invest in long-term policies that benefit both the firm and the worker.