RES EAR C H Open Access
An application of growth diagnostics on
the growth of firms: with evidence from
and Helen Lawton Smith
Rochester Institute of Technology
(R.I.T), Prishtina, Kosovo
Full list of author information is
available at the end of the article
This paper provides evidence on the impact of the business environment on the
growth of firms in less-developed countries, with evidence from Kosovo firms. The
theoretical perspective used is growth diagnostics. The data used to test the
hypotheses were obtained from two different sources: international surveys and
a manager survey dataset. The findings show that the business environment in
Kosovo provides little incentive for firm growth. Further, empirical evidence shows that the
business environment in Kosovo is characterised by low appropriability, with a high cost of
capital, and in which complementary factors in the form of human capital are scarce.
Keywords: Public goods, Constraints on growth, Infrastructure, Finance, Institutions, Firm-
Intending to create economic value, firms react to their business environment in differ-
ent ways. In most cases this reaction is affected by factors outside the firm’s control. In
literature these factors are known as business environment factors. The ones most
commonly explored by empirical studies include physical infrastructure, the legal sys-
tem, the financial system, various aspects of the micro and macro policy environment
such as taxation, regulation, macroeconomic stability and social factors such as crime
and corruption in a society (Carltemp_reference_xmin and Seabright 2007).
By using information from various international and national sources, the purpose of
this paper is not only to examine the set of constraints to the growth of firms but also
to find out which of these constraints is the most binding. The methodology also fol-
lows two steps. The first is to find out which constraints are indicated to be significant
among the set of constraints. The second is to identify the most binding constraint.
Findings indicate that the most binding constraint is related to appropriability factors.
Several symptoms point out that government in the country fails to provide necessary
public goods. This is indicated by micro-risk factors such as unfair competitive prac-
tices, rule of law, and high levels of corruption. Appropriation factors are followed by
access to finance and complementary factors in the form of human capital as
constraints that matter the most for growth.
Journal of Innovation and
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Sahiti and Smith Journal of Innovation and Entrepreneurship (2017) 6:16