Implication of Market Imperfections for Economic Development Finance

IMPLICATION OF MARKET IMPERFECTIONS FOR ECONOMIC DEVELOPMENT FINANCE As the period section shows, the operation of capital markets does not match the assumptions underlying perfect competition but instead is characterized by market imperfections that can create capital availability gaps. Despite the united states well developed capital markets, a firm’s location, industry, amount and form of capital needed and the number and type of financial institutions serving its area can all affect its access to capital. Nonetheless, some common capital markets imperfection first, equity capital in amount below several million dollars is not available from public markets and institutional sources. Moreover, for small and early stage firms, equity capital is largely limited to firms in “hot” industries with perceived high growth potential. Second, debt capital for small firms and in amounts below several million dollars in largely available from private financial institutions. Thus, debt availability is dependent on competition and lending polices within the local banking and commercial finance market. Small business and real estates loan below $50,000 are not available from private financial institutions in most markets and in some cases the threshold may be higher furthermore, regulatory policies, cyclical economic conditions and limited competition all affect the cost and availability of debt. Several implications for economic development finance practice emerge from this analysis. First, local economic and financial market conditions shape capital supply gaps. Therefore, to design effective intervention strategies, practitioners need to understand local capital market conditions, the private financial institutions active in their region and how their business strategies and lending policies affect capital supply. The formal aspects of capital market analysis and its application to program design, since capital markets are dynamic, with conditions changing capital