In this paper, we investigate the root cause for large MSMEs finance gap. We advance five propositions for the mechanism through which the distorted financial structure generated by a comparative-advantage-defying strategy leads to large MSMEs finance gap. We then use panel data from 115 countries to test the propositions and find that, the adoption of a comparative-advantage-defying strategy accelerates the development of state-owned enterprises in capital-intensive industries, leading to concentrated banking sector and oversized state-owned enterprises obtaining high proportions of loans and enjoying low interest rate on borrowings. Finally we use cross-sectional data in 2017 to show that the adoption of a comparative-advantage-defying strategy is associated with large MSMEs finance gap. The paper suggests that the root cause for large MSMEs finance gap is the government's inappropriate development strategy.
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