Pii: S0305-750x(00)00096-6

Ð In developing countries, credit shortages are often so severe as to impact a ®rm's dayto-day production decisions. Using ®rm-level data from ®ve African countries, I show supplier credit is positively correlated with capacity utilization; the result continues to hold when credit access is instrumented using supplier characteristics. I claim that this is because ®rms lacking credit likely face inventory shortages, leading to lower rates of capacity utilization. This explanation yields several further predictions that are supported by the data: there is a positive relationship between supplier credit and inventory holdings; moreover, raw materials ``stockouts'' are positively correlated with capacity utilization, particularly in ``inventory-intensive'' industries. Ó 2001 Elsevier Science Ltd. All rights reserved.