Abstract
Small and Medium Enterprises (SMEs) play a vital role in the economic development of the country providing employment to a huge portion of the total non-agricultural labour force. But SMEs are unable to work at their full potential because of many obstacles, including financial challenges being the severe ones. The present study analyzed the impact of different financial resources and financial constraints on labour productivity. Labour productivity is an important determinant of SMEs’ performance because of the major employer of non-agricultural labour. The “Enterprise Survey Data-2013” was utilized for regression analysis. The results revealed that internal finance is preferred by most SMEs and it increased labour productivity. Bank finance and equity finance had a negative impact because of the “pecking order theory”. Finance from Non-Bank Financial Institutions had a positive while trade credit and informal finance had a negative impact on labour productivity. The impact of financial constraints for fixed assets denied the prior expectations, supporting the results that SMEs relied upon internal finance. SMEs used more internal finance proving that these SMEs were working at increasing returns to scales and able to provide the collateral requirements of fixed assets. It is concluded that small firms were more constrained financially. As the size of the firm increases will be the firm financially constrained. Additionally, the “learning by doing hypothesis” was working for the present sample of SMEs. The government should work to bring financial market stability while SMEs should work with better business plans.