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Determinants of financing constraints: Evidence from European SMEs

Publication EMN Working papers


The scientific literature identifies access to finance as one of the main limitation of firms’ investment behavior, but the nature of the investment also influences their access to finance. Innovative firms are more financially constrained due to asymmetric information, lack of collateral and sunk cost. Despite a vast contribution of empirical studies about firms’ characteristics explaining financial frictions, analysis of supply-side characteristics justifying such statements remains less explored. Using a Recursive Bivariate Probit Model and survey data, the present paper aims to assess which factors in the financial market (supply side) have a higher impact on firms’ likelihood to be financially constrained when they have growth ambitions and need external finance. The results show that after controlling for potential endogenous bias due to unobservable firm characteristics, being an innovative firm increases the probability of being financially constrained between 24% and 33%. For financially constrained firms, the main factors that limit future financing for growth ambitions are the lack of collateral and too high a price. The main results indicate that measures to facilitate equity investments and making existing public measures easier are the most important factors for future financing while tax incentives only play a minor role.

The results of the study can be particularly useful for policy makers, providing evidence of the set of policies needed to improve financial inclusion, especially for companies most in need and playing a key role in the economy, as innovative SMEs. As a complement to direct or indirect support for R&D and Innovation (more focused on investment in fixed assets), innovative companies also need financial support for daily activities. Launching a new product on the market has not only new production costs but also implies higher working capital needs, in order to pay suppliers and workers while the company finds new customers or markets and generates liquidity. Making venture capital operations easier, providing access to credit lines or secured loans could be complements to direct and indirect support to reduce the financing pressure on innovative firms and entrepreneurs across Europe.


Access to finance; innovative firms; European Union.

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