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Project 1 Investing for the future

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ERC3 - Project 1. Investing for the Future - Finance, strategy and investment in SMEs. June 2018

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Project 1 Investing for the future

  1. 1. Investing for the Future? Finance, strategy and investment in SMEs Mark Hart, Stuart Fraser and Victor Ekpu
  2. 2. Financial constraints and missing links • Research from ERC2, with LSBS data, indicates that the firm’s financial status in one year (2015) has a significant effect on its performance in the following year (2016). • Relative to successful seekers (SS) of finance in 2015, who achieved a productivity of £163,000 sales per worker on average in 2016, other things equal: – The productivity of happy non seekers (HNS) was £123,000. – The productivity of discouraged borrowers (DB) was £154,000. – The productivity of failed seekers (FS) (who were rejected by finance providers) was £140,000. • This lower performance due to financial status is consistent with: – Financial constraints among DB and FS who have unmet external capital needs. – ‘Control aversion’ among HNS who, whilst not having external capital needs, seem to ‘prefer’ lower performance to using external finance.
  3. 3. Financial constraints and missing links • Analysis sheds light (for the first time) on various strategic and operational mechanisms linking financial constraints/undercapitalisation to subsequent firm performance • Specifically, this analysis looks at the impact of financial status on – The implementation of business strategies (a mediating mechanism). – The performance benefits derived from existing business capabilities (a moderating mechanism). • The main mechanism accounting for lower productivity among HNS is that they have a lower likelihood of implementing business strategies (relative to SS). • The main mechanism accounting for lower productivity among DB and FS is that they derive lower performance benefits from their existing business capabilities – So whilst DB and FS push ahead with business strategies their capabilities in implementing these strategies are compromised by financial constraints.
  4. 4. Relationships between financial status, business strategies, capabilities, and performance Financial Status: Happy non seeker Discouraged borrower Failed seeker Successful seeker Business Strategies: Human resource Innovation Small Firm Performance: Productivity Business Capabilities: Strategy implementation Operational improvement
  5. 5. Research Questions These questions extend and develop the previous project and extend this to consider impacts of financial constraints on intangible investments: RQ1: Examining further mechanisms linking financial status to firm performance (e.g., via investment in tangible and intangible assets). RQ2: Estimating the quantitative impacts of unmet external capital needs (“funding gaps”) on firm performance (to go beyond the qualitative impacts of financial status). What is the impact of a £1 increase in funding gaps on firm performance? RQ3: Understanding the longer term impacts of financial status/funding gaps on firm performance. RQ4: How do financial constraints impact on SMEs’ willingness to invest in intangibles and innovation?
  6. 6. Data RQ1: Examining further mechanisms linking financial status to firm performance RQ2: Estimating the quantitative impacts of unmet external capital needs (“funding gaps”) on firm performance. RQ3: Understanding the longer term impacts of financial status/funding gaps on firm performance. Current analysis is based on LSBS waves 1 and 2. Additional data from LSBS Wave 3 is now available and provides insight into the longer term effects of finance constraints RQ4: How do financial constraints impact on SMEs’ willingness to invest in intangibles and innovation? UK Innovation Survey provides data on firms’ investment in intangibles as part of their innovation activity as well as data on financial constraints. This covers design, R&D etc as well as training and capital investment and computer software for innovation.
  7. 7. Project plan RQ1: Examining further mechanisms linking financial status to firm performance RQ2: Estimating the quantitative impacts of unmet external capital needs (“funding gaps”) on firm performance. RQ3: Understanding the longer term impacts of financial status/funding gaps on firm performance. ERC research paper 1 - November 2018 RQ4: How do financial constraints impact on SMEs’ willingness to invest in intangibles and innovation? ERC Research paper 2 – Jan/Feb 2019

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