Working capital financing and enterprise performance in Uganda

Abstract

The objective of this research was to examine the effects of financial sources on enterprise performance in Uganda. Specifically, the study looks at which source among retained earnings, formal and informal financial sources is more effective in improving enterprise performance. Using a cross-sectional World Bank Enterprise survey dataset and pooled Ordinary Least Squares estimation (OLS) under Conditional Mixed Process Framework, the results indicate that both formal and informal sources of finance significantly and positively influence enterprise performance compared to retained earnings. However formal finance has the largest impact on enterprise performance. The study also finds evidence that firm attributes such as firm age, size, and innovation capacities also influence firm performance. Furthermore, the study finds evidence that a weak business climate in form of informal payments, obstacles of business licensing, informal competition, and tax administration among others limit the enterprises’ ability to improve its performance. Based on these findings the study recommends for policies aimed at overcoming obstacles in obtaining formal finance as well as making financial services accessible and affordable. This can be through viable credit mechanisms that support and strengthen the capacity of enterprises to improve their performance.