This paper examines the role of financing constraints in generating aggregate total factor productivity (TFP) losses. Using plant-level data from manufacturing firms in Korea and Colombia, the authors analyze how financial frictions affect resource allocation across productive units. They find that while financing frictions are significant, the resulting TFP losses are relatively small. In Korea, TFP losses are about 2%, and in Colombia, only 1%. These losses are attributed to the relatively small differences in returns to capital and variable factors across expanding and contracting plants. The authors argue that the smaller TFP losses in Colombia are due to both more severe borrowing frictions and a stronger precautionary savings motive. They also show that a model with more severe borrowing constraints would overpredict the difference in returns to factors for young plants compared to older plants. The paper also examines the impact of a financial crisis on TFP, finding that a severe crisis in Korea led to a 2% TFP decline, which is about 60% of the observed TFP drop. The authors conclude that financial frictions have a limited role in explaining TFP losses, as the data suggest that plants can accumulate internal funds and grow out of borrowing constraints. The study highlights the importance of considering both the strength of borrowing constraints and the precautionary savings motive when analyzing the impact of financial frictions on TFP.This paper examines the role of financing constraints in generating aggregate total factor productivity (TFP) losses. Using plant-level data from manufacturing firms in Korea and Colombia, the authors analyze how financial frictions affect resource allocation across productive units. They find that while financing frictions are significant, the resulting TFP losses are relatively small. In Korea, TFP losses are about 2%, and in Colombia, only 1%. These losses are attributed to the relatively small differences in returns to capital and variable factors across expanding and contracting plants. The authors argue that the smaller TFP losses in Colombia are due to both more severe borrowing frictions and a stronger precautionary savings motive. They also show that a model with more severe borrowing constraints would overpredict the difference in returns to factors for young plants compared to older plants. The paper also examines the impact of a financial crisis on TFP, finding that a severe crisis in Korea led to a 2% TFP decline, which is about 60% of the observed TFP drop. The authors conclude that financial frictions have a limited role in explaining TFP losses, as the data suggest that plants can accumulate internal funds and grow out of borrowing constraints. The study highlights the importance of considering both the strength of borrowing constraints and the precautionary savings motive when analyzing the impact of financial frictions on TFP.