Introduction

The growth of small and medium-sized enterprises (SMEs) aids local economic development in low- and middle-income countries since small businesses create employment, revenue, and more economic interactions among other small firms, increasing the local multiplier effect in communities (Blair and Carroll 2008). SMEs also have a greater participation in employment creation than large businesses (Ayyagari et al. 2007; Ayyagari et al. 2014). However, SME growth remains an issue as levels of labor productivity in low- and middle-income countries are much lower than in more developed economies (Beck and Demirguc-Kunt 2006). Constraints in the access to capital markets may contribute to low productivity levels, and prevent a larger participation of SMEs. The presence of information asymmetries between borrowers and lenders may be a possible reason for the inadequate availability of access to external finance when borrowers have private information regarding their project quality. This unavailability of access to capital may lead to credit rationing in the market (Stiglitz and Weiss 1981). In this scenario, newer and smaller firms may use lending technologies, such as fixed-asset collateral guarantees and externally revised financial statements in order to signal project quality when lenders have less information regarding a firm’s operating activities (Chan and Kanatas 1985). In the absence of lending technologies, small and mediumsized firms may rely on exporting activities to signal lenders project quality since this may indicate that firms have good projects to invest. As a result, taking into consideration whether firms have good projects to invest is critical to understanding the relationship between credit constraint and productivity as the internationalization of SMEs, through selling in international markets, may signal efficiency and competitiveness to lenders. SME project quality could be taken into consideration by measuring a firm’s exporting activities, or the percentage of sales that were exports, either in direct or indirect form (Love and Roper 2015). Within the context of information asymmetry and imperfections in capital markets, having better project quality in terms of direct and indirect exports may alleviate the negative impact of financing constraints on SME labor productivity. The rationale for this possibility is that productivity is enhanced as a result of increasing exporting activity since the stronger competition in foreign markets may force firms to improve both products and processes in order to remain competitive (Ganotakis and Love 2012). The main purpose of this study was to investigate the impact of both lack of access to external finance and project quality, measured as the percentage of export sales, on SME labor productivity. We have also examined whether exporting activities alleviate the impact of credit constraints on labor productivity. The issue of low productivity is a major challenge for SMEs in low- and middle-income countries. Low productivity levels may be explained, among other factors, by the lack of adequate access to external finance, as SMEs may not have the necessary means to expand their activities due to credit constraints. This study also aimed to examine the separate effects of direct and indirect export sales on labor productivity for credit-constrained firms due to the high costs associated with exporting directly. We classify firms SMEs that either applied for a bank loan but were rejected or were discouraged from applying as credit constrained (Leon 2015).