Equity, Not Debt, Emerging as the Real Engine of Firm Growth in Developing Markets-World Bank

 

Young and fast-growing companies in low and middle income countries expand more rapidly when they tap equity rather than piling on debt. That is one of the central insights highlighted by Cesaire Assah Meh, co-editor of the World Bank’s new book Financing Firm Growth: The Role of Capital Markets in Low- and Middle-Income Countries, during a recent World Bank Group seminar.

Assah Meh said evidence across developing economies shows equity is better suited for firms seeking to scale in sectors where returns are uncertain and information is limited.

Equity Aligns with High-Risk, High-Growth Investments

The book notes that many emerging-market growth opportunities hinge on intangible assets like R&D, technology and software assets that banks struggle to finance because they offer little collateral.

Equity investors, however, take on risk in exchange for shared upside, making equity a far more natural match for innovative, early-stage firms. Studies from advanced economies show technology companies fund almost all R&D from internal cash flow or public equity markets.

Debt Can Become a Drag on Expansion

The report acknowledges that debt is useful, but warns that over-reliance can choke expansion. Heavy interest payments reduce investment capacity, and rising leverage can deter firms from pursuing new opportunities.

In the years after the global financial crisis, many firms in emerging markets issued more bonds and took on more debt — but higher leverage often led to weaker financial performance. For firms operating with uncertain returns, limited collateral and opaque information, the evidence suggests debt is a poor substitute for equity.

Domestic Markets Deliver the Biggest Productivity Boosts

The book finds strong issuance in both domestic and offshore markets, but the most significant gains in performance came from smaller, financially constrained firms that accessed domestic capital markets.

Local market issuance was closely associated with improvements in firm-level productivity and broader gains in aggregate productivity. Equity issuance delivered the strongest link to growth.

Offshore Markets Still Play a Role  for Those Who Can Access Them

Offshore markets offer clear advantages: access to global investors, better pricing and improved risk management. But high fixed costs and information barriers keep most smaller firms out. The study notes that more analysis is needed to understand how firms use proceeds raised internationally, whether for investment, expansion or refinancing.

A Policy Signal for Governments and a Strategic Lesson for Entrepreneurs

Assah Meh’s presentation highlights a key policy message: deepening domestic capital markets is essential for supporting firm expansion and unlocking productivity in developing economies.

For entrepreneurs, the takeaway is direct. Heavy borrowing can limit flexibility. Equity , whether raised from investors, public markets or reinvested earnings provides the room to innovate, grow and compete in markets where risk and uncertainty are unavoidable.