Businesses in developing countries often face higher borrowing costs than comparable firms in wealthier economies. According to new research, firms in low- and middle-income countries pay an average of two percentage points more in real interest, creating a major barrier to private sector growth, investment and job creation.
The research examines more than 330,000 bond issuances by over 50,000 firms across 138 countries between 1990 and 2024. It provides a clearer picture of the factors that influence corporate borrowing costs and shows how policy choices, domestic financial systems and company transparency all affect the price businesses pay for debt.
One major factor is macroeconomic and capital account policy. Some developing countries restrict foreign investor participation in domestic bond markets to reduce exposure to sudden capital flows. While this can protect financial stability, it also limits lender competition and raises borrowing costs for businesses.
The research finds that countries opening their markets to foreign investors experience an average decline of 1.2 percentage points in international corporate borrowing costs. For the least financially open developing countries, this could have saved an estimated USD 78 billion in interest payments over the past decade.
Government borrowing costs also strongly influence business borrowing costs. Since corporate debt is often priced relative to government bond yields, higher public borrowing costs make private borrowing more expensive. A one percentage point rise in government bond yields can increase corporate borrowing costs by 76 basis points.
This means weak public finances can crowd out private borrowers and make it harder for businesses to invest. When governments borrow at high rates, firms also face higher financing costs, reducing their ability to expand, hire workers and innovate.
A second major factor is the strength of the domestic investor base. Countries that develop prefunded pension systems tend to see more companies entering bond markets for the first time. For established borrowers, pension reform can reduce borrowing costs by about 150 basis points within four years.
Domestic capital markets can also protect firms from global financial shocks. When the U.S. Federal Reserve raises interest rates, borrowing costs rise much more for companies borrowing internationally than for those borrowing domestically. This shows the importance of deep local financial markets in supporting business resilience.
Corporate governance and transparency are also important. Unlisted firms in developing countries pay higher borrowing costs than publicly listed firms because investors often lack reliable information about their financial position and ownership structures.
The research finds that unlisted firms pay 84 basis points more in international borrowing costs than listed firms. Countries with stronger disclosure requirements, audited financial statements and transparent ownership systems tend to have lower borrowing costs and broader access to bond markets.
The findings show that borrowing costs are not determined only by a company’s own creditworthiness. They are also shaped by national policies, sovereign debt management, financial openness, domestic capital markets and the quality of corporate governance.
Policymakers can reduce financial barriers to private sector growth by opening capital accounts carefully, strengthening domestic pension systems, improving public debt management and promoting greater corporate transparency. These reforms can help lower borrowing costs and make capital more accessible.
Overall, reducing borrowing costs can free up resources for hiring, innovation and business expansion. For developing countries where capital remains scarce and expensive, targeted financial reforms can play a major role in boosting private investment, creating jobs and supporting long-term economic development.
