Mature micro-firms and their experience of funding shortages

Funding shortages are analysed in the context of a simple neoclassical model of the micro-firm that uses financial capital for its operations. It predicts that a response to funding shortages is to substitute part-time workers for full-time workers, under the assumption that the latter are the more financial capital intensive employees. The experience of funding gaps in finance capital by long-lived micro-firms is investigated using data which were obtained by telephone interviews. The micro-firms examined had an average size of six full-time and two part-time workers, and an average age of fifteen years. Using probit estimators of the probability of experiencing funding shortages it is found that a strong and significant negative association exists between the number of part-time workers and the probability of experiencing funding shortages, refuting the simple neoclassical hypothesis, and suggesting an alternative hypothesis, emphasising the flexibility advantages of part-time embloyees in averting funding shortages. A ten per cent increase in part-time employees is shown to reduce the probability of experiencing funding shortages by two and a half per cent. A regional effect was also discovered, and bivariate probits gave results which were consistent with univariate probits.Professor in Economics and Director of the Centre for Research into Industry, Enterprise, Finance and the Firm (CRIEFF), University of St Andrews.