The effects of government debt on corporate borrowing in developing economies: evidence from Africa

Many African economies face high debt levels, yet local firms have unique growth opportunities requiring external financing. We examine whether government borrowing constrains corporate financing in Africa and how these effects differ by debt source. Using a manually collected dataset from 29 African countries (2000–2019), we uncover financing patterns that challenge conventional theories. In sharp contrast to firms in developed markets, we find that African firms experience a “crowding-in” effect when governments borrow externally, enhancing their access to debt. In contrast, domestic government borrowing induces the typical crowding-out effect, where government borrowing reduces corporate access to debt. The crowding-in phenomenon is most evident among publicly listed firms, particularly those cross-listed on foreign exchanges (the multinationals). The effect strengthens in countries with higher Eurobond market activity and intensifies following sovereign credit downgrades, underscoring the sovereign ceiling’s constraint on corporate borrowing. Our findings contribute significantly to international business literature by revealing how African debt markets function differently, highlighting unique financing challenges faced by African multinational enterprises, and demonstrating that economic principles established in developed markets cannot be universally applied to emerging economies. These insights are crucial for designing effective policies to support corporate growth in Africa.