Several studies have shown that access to finance is critical for firm growth, but scant
research has demonstrated the impact of human capital constraints on firm performance. This
study analyzes the impact of labor constraints on firm growth with an emphasis on small and
medium size enterprises (SMEs). In Peru, SMEs play a critical role in the economy, accounting
for nearly all businesses and employing over half of the active working population. According to
the 2010 World Bank Enterprise Surveys, over one-third of all Peruvian firms cite an
inadequately trained workforce as the major obstacle to growth. Using OLS regression analyses,
this study investigates how human capital constraints affect firm performance and whether these
effects vary by firm size. The findings of this analysis indicate the importance of looking beyond
credit constraints to help fuel small business growth in developing countries. Complex labor
regulations are found to have a negative impact on firm growth, with a larger effect on small
businesses. These results have important policy implications for incentivizing governments to
invest in long-term policies that benefit both the firm and the worker.