This study focuses on the impact financial development on the performance of firms
in countries with low financial development. Previous studies focusing on financial depth alone find that
financial development does not affect, or has a negative effect on, economic growth in developing countries
with undersized financial systems. Using firm-level data in panel for a sample of 26 countries, we find that
this hypothesis is invalidated if one takes into account not only financial depth but also financial inclusion,
i.e.
the distribution of access to financial services. Contrary to developed countries where financial inclusion
is nearly universal, differences in access to credit among firms help explaining differences in firms perfor-
mance. We measure financial inclusion as the share of firms who have access to bank overdraft facilities, or,
alternatively, to any external source of financing, at the sectoral level. We find that whereas financial devel-
opment does not affect firm performance on average, financial inclusion has a positive effect on firms growth.
Where financial inclusion is low, financial development may create crowding out effects in favor of a minority
of firms or government that phase out or reverse its expected positive effects of financial development on
growth. Additional testing show that these effects affect all firms, irrespective of size, or whether they have
access to bank credit or not. We interpret these results as showing that financial deepening increases firms
growth only if it widely distributed among firms, i. e. financial inclusion is high.
