Micro and small enterprises (MSEs) in developing countries are typically considered to be
severely credit constrained. Additionally, high business risks may partly explain why the
capital stocks of MSEs remain low. This article analyzes the determinants of the capital
stocks of MSEs in poor economies focusing on credit constraints and risk. The analysis is
based on a unique, albeit cross‐sectional but backward‐looking, micro data set on MSEs covering
the economic capitals of seven West‐African countries. The main result is that capital
market imperfections indeed seem to explain an important part of the variation in capital
stocks in the early lifetime of MSEs. Furthermore, the analyses show that risk plays a key role
in capital accumulation. Risk‐averse individuals seem to adjust their initially low capital
stocks upwards when enterprises grow older. MSEs in risky activities owned by wealthy
individuals even seem to over‐invest when they start their business and subsequently adjust
capital stocks downwards. As other firms simultaneously suffer from capital shortages, such
behaviour may imply large inefficiencies