Democracy, financial liberalisation, and firms’ access to finance: New evidence from around the world

This study examines why firms’ access to finance differs across countries and assesses the extent to which democracy and financial liberalisation account for these variations. Using political economy and liberalisation theories as a foundation, we analyse a comprehensive dataset of over 110,000 firms across 112 economies between 2006 and 2021. Although previous research identifies firm-level and macroeconomic sources of financial frictions, evidence on the institutional drivers of cross-country financial access remains limited. Our findings show that democracy and financial liberalisation, when considered independently, are associated with reduced access to finance. However, when both conditions coexist, they ease financing barriers and enhance access to finance. These results remain consistent across multiple robustness tests, including alternative model specifications, endogeneity corrections, and various measures of institutional quality and financial openness. Overall, the study highlights that neither democracy nor liberalisation alone is sufficient to enhance access to credit. Instead, simultaneous institutional strengthening and financial market access are necessary to ease financing barriers. This has important policy implications, particularly for emerging and developing economies seeking to expand firm-level access to capital and stimulate economic growth.