Firm Growth and Liquidity Constraints: A Dynamic Analysis

Using a large unbalanced panel data set of Portuguese manufacturing firms surviving over the period from 1990 to 2001, the purpose of this paper is to examine whether liquidity constraints faced by business firms affect firm growth. We use a GMM-system to estimate a dynamic panel data model of firm growth that incorporates cash flow as a measure of liquidity constraints and persistence of growth. The model is estimated for all size classes, including micro firms. Our findings reveal that smaller and younger firms have higher growth-cash flow sensitivities than larger and more mature firms. This is consistent with the suggestion that financial constraints on firm growth may be relatively more severe for small and young firms. Nevertheless, the same finding can be interpreted in a different way if we consider the more recent literature which interpret the higher investment/cash flow sensitivity of younger and smaller firm in absence of financial market imperfection as the outcome of these firms reaction to the fact that realisation of their cash flows reveals them the direction to go in presence of uncertainty of their growth prospect. Besides, firms that were small and young at the beginning of the sample period exhibited more persistent growth than those that were large and old. Finally, these results have significant policy implications.      

Creating good public policy to support high-growth firms

Writing in Small Business Economics Scott Shane argues that policy-makers should stop subsidising start-ups and instead focus on supporting the small subset of new businesses with high growth potential. However, both Shane and other scholars who have made the same argument only offer broad-brush proposals to achieve this objective. The aim of this article, in contrast, is to engage in a detailed discussion of how to create appropriate policies for high-growth firms (HGFs). Drawing on research in Scotland, we argue that policy-makers are looking for HGFs in the wrong places. The heterogeneous nature of HGFs in terms of sector, age, size and origins makes in impractical to target support on particular sectors, technologies or types of firms (e.g., new or R&D intensive). The article proposes a reorientation of HGFs, both in terms of appropriate targeting and forms of support. Public policy also needs to focus on the retention of HGFs which are acquired by non-local businesses. Finally, policy-makers need to properly reflect upon the specificities of their entrepreneurial environment when devising appropriate policy interventions.     

Job machine,think tank,or both: what makes corporate spin-offs different?

One way through which knowledge and technology transfer can take place is through the foundation of new firms by former employees of incumbent private firms. In this paper, we examine whether knowledge transferred from the incumbent causally affect employment growth and post-entry innovation activities of the new firm. We focus on start-ups for which a new idea (a new product, technology, production process, or management concept), which the founder developed during her work as an employee, was essential for setting up the new business. These firms are denoted corporate spin-offs. Using data from German start-ups founded in the period from 2005 to 2008, we apply nearest-neighbour propensity score matching. We find that corporate spin-offs outperform other start-ups founded by former employees of incumbent private firms that are not based on an essential idea in terms of post-entry innovation activities. However, we cannot show that corporate spin-offs benefit from the transferred idea in terms of employment growth. We conclude that a transferred idea is primarily an input factor and a stimulus for subsequent post-entry innovation activities of corporate spin-offs.     

Resource and Capability Constraints to Innovation in Small and Large Plants

In an attempt to enhance firm’s competitiveness, policy initiatives have sought to encourage more firms to innovate, with a particular focus on small firms. The success of such initiatives, however, depends on a clear understanding of the factors that are constraining innovation activity, and whether these differ for firms of different sizes. This paper examines those resources and capabilities that firms identify as constraining their innovation activity, the difference in these for small and larger plants and the actual impact of these perceived constraints on the probability of innovating and the degree of innovation success. Drawing on longitudinal data the paper demonstrates that innovation is an evolutionary process with the constraints to innovation being different for small and larger plants. From a policy perspective, initiatives to overcome constraints to innovation in small plants should extend beyond those of finance to include greater networking opportunities, cost reduction programmes and marketing strategies to increase the profit margin on new products, human resource management practices on implementing change and easier access to information about new technologies. In contrast policies to promote innovation in larger plants should focus on minimising the risk of development and enhancing access to specialist expertise.     

The Provision of Finance to Innovation: A Survey Conducted among Italian Technology-based Small Firms

Financial constraints to the development of innovation are often considered one of the main impediments to high-technology firms seeking to expand and grow. In particular this is the case of small and medium size high-tech firms. In the U.S. and the U.K. a variety of sources of finance are available to the start-ups of innovative firms; in the other European countries, and particularly in Italy, these means are still uncommon so that the development of technology is often prevented. This paper, based on an empirical analysis on a survey of 46 small high-tech Italian firms, aims at exploring the problems experienced by small businesses in gaining access to debt and equity finance. The results highlight that traditional financial sources are inadequate to finance innovative projects. The questioned firms rely mainly on personal finance, and secondly on short term bank debt; they are truly involved in maintaining control over the firm activities and are willing to issue outside equity only if the new investors also provide non financial competencies. Among the 46 interviewed firms, only 10 are willing to be listed in the future on small firms' stock markets.     

Small firms finance in France

The data concerning interest rates paid by small and medium sized firms on credit and financial markets as well as the available balance-sheets confirm the idea that firms have difficulties to get financial resources. This paper tries to put in light the financial disparities among firms when a discrimination resting on size characterises the functioning of credit market. The first section presents the main financial characteristics of French SMEs: the low level of equities, the heaviness of short term debts and the over use of payment delays. Section 2 shows how French and European authorities reacted in order to improve the financial situation of SME's and to reduce their liquidity constraint, changing tax policy and promoting the creation of new means of financing.     

The Choice between Bank Debt and Trace Credit in Business Start-ups

This paper investigates the choice between bank debt and trade credit in business start-ups. While trade credit is more expensive than bank debt, suppliers tend to follow a more lenient liquidation policy when client firms encounter financial distress. As a result, suppliers are more willing to renegotiate the outstanding debt or grant additional debt whereas banks are more likely to liquidate borrowers upon default. Given the risky nature of business start-ups, we argue that the entrepreneur’s choice of debt instruments reflects these differences in liquidation policy between lenders and is thus determined by the venture’s failure risk, the entrepreneur’s private control benefits that are lost upon liquidation and the liquidation value of firm assets. Using unique data on 325 first-time business start-ups, we find that firms in industries with high historical start-up failure rates and entrepreneurs who tend to highly value private benefits of control use less bank debt. These effects are especially prevalent in start-ups where assets have a high liquidation value and thus banks are more likely to liquidate the venture following default. An erratum to this article can be found at     

The latent demand for bank debt: characterizing “discouraged borrowers”

Concerns that small firms encounter credit constraints are well entrenched in the literature, despite widespread empirical evidence that a relatively small proportion of small firms have their loan applications rejected. However, many firms may be discouraged from applying for fear of rejection. These businesses are the focus of this paper. Based on responses to a large-scale postal survey of UK small and medium-sized enterprises (SMEs), we find that twice as many businesses were discouraged from applying for a bank loan than had their loan request denied. More particularly, we observe a number of distinguishing characteristics of “discouraged borrowers” (relative to applicants). These include: strategy, sector, prior entrepreneurial experience and banking relationships. The implications of our findings for policy and future research are briefly discussed.     

Regional competitiveness, university spillovers, and entrepreneurial activity

This study examines the impact of regional competitiveness on the innovative activity of entrepreneurial firms. Based on a unique and hand-collected dataset of publicly listed high-technology start-ups and university regions, this paper tests how regional competitiveness and university spillovers affect the innovation behavior of entrepreneurial firms. The results provide strong evidence that regional competitiveness and university spillovers are strong complements in fostering innovation activity of entrepreneurial firms. However, the results also raise the question whether incentives for universities and their actors might lead to crowding out effects.     

Financial Constraints and Small and Medium-Sized Firms’ Export Propensity: Evidence from Portuguese Manufacturing Firms

The internationalization of firms through exports is often crucial to their survival and growth in this era of globalization. This is particularly the case for small and medium-sized enterprises (SMEs) operating in small and saturated markets, as is the case in Portugal. However, firms face several barriers to exporting, and this study aims to verify whether financial constraints influence a firm’s export propensity. The empirical analysis is based on a sample of 12,732 Portuguese manufacturing SMEs during the period 2008–2012, and tests two different proxies of financial constraints: the liquidity and leverage ratios. The results indicate that the SMEs in less healthy financial positions are less likely to export than the others are, although the impact of financial constraints on these Portuguese firms appears to be relatively small.     

Small businesses and liquidity constraints in financing business investment: Evidence from shanghai's manufacturing sector

When firms experience financial hierarchy, external finance, if at all available, is substantially more expensive than internal finance. Factors such as transaction costs, agency problem, and asymmetric information have created such a hierarchy. Stiglitz and Weiss (1981) argue that asymmetric information between firms and potential suppliers of external finance creates adverse selection and moral hazard problems in the credit market in developed market economies. This problem of a higher cost of external finance is commonly thought to be more serious for small firms because they are more disadvantaged than their larger counterparts in accessing external finance due to several factors: (1) Public information on small firms is generally not available and leads to the even greater problem of asymmetric information, i.e., more severe adverse selection and moral hazard problems. These information problems have excluded small firms from bond and share markets. (2) Due to the lack of available means of external finance, small firms rely more heavily on bank loans than their larger counterparts. In addition, as small firms are more interested in cultivating stable relationships with a few banks in order to secure a stable supply of credit, these banks become virtual monopolies by lending to small businesses and exercise their market power in lending to small firms.Most of existing research considers only small firms in market economies; little research has been done to understand the relationship between firm size and investment financing in any economy in transition. This paper makes a contribution to the literature by studying the relationship between firm size and liquidity constraints by using a firm level data of manufacturing enterprises in Shanghai during the period of 1989–1992. We consider whether small manufacturing firms in Shanghai are constrained by the availability of liquidity compared with their larger counterparts when they are financing their fixed investment. In a transforming economy such as China (or other similar transition economies), external finance relies heavily on loans from banks that are fully owned by the state. Due to historical reasons, allocations of credit are always biased in favor of state-owned enterprises. Such a `lending bias' imposes an extra cost on small Chinese enterprises in financing investment as the majority of them are not state-owned.In such an environment, our empirical results show that small manufacturing firms in Shanghai are actually less liquidity-constrained than their larger counterparts in financing their fixed investment. This surprising result is rather different from what people normally predict based on the experience in market economies. We suggest three possible explanations for this peculiar finding: (1) The composition of various firm size classes plays an important role in explaining the result: Non-state enterprises which are fast growing and efficient dominate the small firm classes. Their successes in the markets helps them to generate enough internal funds to smooth their investment over time. (2) The presence of heavy indebtedness of large state-owned enterprises may deprive them of sufficient cash available for investment decision. Given that state-owned enterprises have been making heavy losses, the central and regional governments have a liquidity problem in satisfying their huge liquidity demands. (3) Small enterprises in non-state sectors can rely on the informal credit market to obtain funds for investment although they are excluded from the state banking system.However, the further trade liberalization in terms of eliminating tariffs and quotas caused by China's bid of joining the WTO will erode the profits of these small enterprises as imported goods will be supplied at lower prices. In addition, further reforms in financial sectors may also affect the supply of external finance to small enterprises in nonstate sectors. The consequence may lead to a tight liquidity constraint for small enterprises in China.     

Defining and Tracking Business Start-Ups

This paper addresses a curious disjuncture between one aspect of regional development theory and the empiricism required to test its implications.On the one hand, researchers long have argued that firm births fuel the growth and development of regional economies. Just as long, however, they have employed different, often ad hoc, approaches to the definition and measurement of key concepts and relationships. The inconsistency among the studies in this literature creates a validity problem. We begin by providing an omnibus definition of a start-up that applies to some degree to all the articles we reviewed, namely, that it is new, active, and independent. We explain why all three criteria should be applied, rather than a subset. Second, we review the data sources that are commonly used to identify start-ups, and compare them using seven criteria. We conclude that ES202 data is the best source. Third, we develop a step-by-step tracking system for identifying new firms. By matching ES202 files from two different years and applying direct enumeration techniques, it is possible to identify newly created establish-ments during that time period with accuracy. This article serves both to explain the differences among the published studies of new firms and economic development, and to provide a common standard that can enhance the validity of future work on the topic.     

Entrepreneurship and innovation networks

In this paper, we give a general introduction to the notion of entrepreneurship and how it has many complex meanings. Entrepreneurs in new firms but also in incumbent firms have a key role in local, regional and national economic development by taking risks to get things done by developing new combinations of ideas and/or doing things differently. In view of this, two of the main questions that are dealt with are: (1) which features make structural differences in institutions and innovation networks remain invariant between decades, and (2) how knowledge about such features can be employed in policy at the national and the regional level. The research questions highlighted in this special issue relate to many pertinent national and regional policy issues. The most apparent concerns conditions conducive for entrepreneurship in the form of new firms and firm growth. In this paper, we also introduce the different contributors to this special issue.     

Employment change in independent owner-managed high-technology firms in Great Britain

There is a growing volume of literature that points to the potential for small technology-based firms to achieve substantial employment growth. As a direct consequence of such work this sector of any economy has attracted increasing attention from national and local Governments concerned with finding ways of revitalising economically deprived localities and creating employment opportunities. This paper provides up-to-date empirical evidence surrounding the ability of small high-technology firms to create additional jobs in Great Britain. In addition, key founder and business characteristics are isolated which are significantly associated with employment change in growing high-technology firms over the 1986 to 1992 period. With respect to factors influencing these high levels of employment growth, a high firm size (in 1986) was found to act positively on employment growth, as was a graduate level education for the key founder. On the finance side firms which had access to and used a multiplicity of sources of start-up finance tended to grow faster. Futher, on the basis of our results we would suggest (and recommend) a Government policy which at the firm level actively encourages high-technology firm start-ups (who record higher rates of survival than firms in more conventional sectors) as well as providing support for existing high-technology firms who have already demonstrated the inclination and ability to grow in employment size.     

Liquidity Constraint on the Production of Firms in Southern Italy

The paper shows how small and medium enterprises located in the less developed regions of Southern Italy face higher liquidity constraints compared to the firms in the Central-Northern Italian regions. The reasons for these constraints are the undersized nature of firms and higher risk of business activity. Consequently, credit rationing is more extensive. In order to analyse the effects on the potential growth of firms’ production, a simple model is presented, followed by estimates for growth. The results confirm the existence of a bottleneck of financial resources devoted to current finance production that limits the accumulation of working capital even when faced with favourable market opportunities.     

Stock liquidity during COVID-19 crisis: A cross-country analysis of developed and emerging economies,and economic policy uncertainty

We investigate the impact of the COVID-19 on firms' stock liquidity across six developed and emerging economies. Unlike prior literature, we further compare the effects of the pandemic between developed and emerging economies, high and low economic policy uncertainty (EPU), and large and small firms. Our results document the significant negative impact of infection cases and deaths on firms' stock liquidity across the sample countries, and the similar effect of their interaction term. We find that the impact is more pronounced in the developed economies, high EPU and small firms, compared to emerging economies, low EPU and large firms, respectively.     

The impact of credit constraints on exporting firms: Evidence from the provision and subsequent removal of subsidised credit

We study the causal impact of credit constraints on exporters using a natural experiment provided by two policy changes in India, first in 1998 which made small‐scale firms eligible for subsidised direct credit, and a subsequent reversal in policy in 2000 wherein some of these firms lost their eligibility. Using firms that were not affected by these policy changes as our control group in each case, we find that credit expansion increased the growth rate of bank borrowing and had a positive effect on exports. The subsequent policy reversal in 2000 had no impact on the growth rate of bank borrowing or on exports.     

Service industries,growth dynamics and financial constraints

This work represents a first attempt to study the effects of financial constraints on firm growth within the business services as it can be argued that firms are different not only in terms of size but also in the way they operate in a specific industry. Thus, firms can be either characterized by the use of intensive professional knowledge or, alternatively, by the use of a workforce with no specific professional skills. For the business services included, the results reveal the relative importance of internal sources of financing with respect to the external ones. The liquidity constraints mainly affect the growth of industries requiring qualified labor pool, such as computer programming and information service activities, as well as the professional and scientific ones. In these sectors, foremost operate small firms with a superior innovation capacity; therefore, they are considered risky and face difficulties in raising debt capital on favorable terms.     

The role of incubator organizations in the founding of growth-oriented firms

The role of incubator organizations, those organizations where entrepreneur work before starting their own firms, is examined. Using a sample of 161 new, growth-oriented firms, the relationships of the new companies to their incubator organizations are considered, as well as the characteristics of the incubator organizations. 5The findings have implications for prospective entrepreneurs. Entrepreneurs in most industry categories do not change geographic location and, in most technical industries, usually start businesses related to what they did before. An individual's decision to join a particular organization results in a particular geographic location and in knowledge about a particular industry. The would-be founder located in an unpromising geographic area and getting experience in an industry offering few opportunities for company start-ups is unlikely to be able to start a growth-oriented technical firm, regardless of personal motivation. However, the prospective founder of a nontechnical firm appears to be less tied to the experience gained in an incubator organization.There are also implications for regional economic development. Because technically oriented start-ups are tied closely to the business of their incubator organizations and because most entrepreneurs don't move when starting, the possibilities for high-technology start-ups may be very limited in many geographic regions. There have been no studies, to date, on why some founders move when starting. Programs to attract entrepreneurs at the time of start-up may have promise, but, at least to date, there is not much evidence of entrepreneurs being mobile at this stage of their careers.Local and regional programs to attract branch facilities of larger corportions have a long history. The emphasis is usually upon attracting facilities that will offer the maximum number of blue-collar jobs. In contrast to this traditional approach, it might be beneficial to shift the emphasis to those facilities most likely to function as incubators. The greatest benefits might come from laboratories or divisions that would “seed” a region with people learning about promising technologies or industries.The role of universities in this process appears to be less direct than is often assumed. Based upon our sample, it appears that software and biotechnology/medical firms often have spun-off from universities or hospitals. However, in other industry categories, it is business firms that have primarily served as incubators. There are currently many experiments underway to create university-affiliated innovation centers or incubator centers intended to help aspiring entrepreneurs. Whether these will enable universities to function more effectively as incubators, spinning off students and faculty who start growth-oriented firms, remains to be seen.     

Domestic and export performances of French firms

The French trade balance deteriorated almost continuously from the late 1990s to the early 2010s. At the macroeconomic level, French export market share deteriorated while domestic sales kept pace with domestic demand. Does this assessment apply to individual firms? Using microlevel data for French industrial firms over the period 2002–12, we explore the link between domestic and export sales. We show that export and domestic sales have a tendency, albeit slight, to move in opposite directions. This may be due to factors such as deliberate strategies to target a specific market or the presence of production constraints. Addressing the resulting endogeneity issue, our analysis shows that a positive demand shock in the domestic market also leads to an increase in exports. In particular, a 10% increase in domestic demand leads to a 4% increase in exports. This complementarity between markets seems to be driven by small firms and could reflect the existence of liquidity constraints. Increased sales in one market could lessen these constraints by facilitating funding for company development in the export market.