Financial frictions and the SME investment gap: new survey evidence for Ireland. Issue 3 (2nd July 2020)

• Record Type: Journal Article
• Authors: Martinez-Cillero, Maria; Lawless, Martina; O'Toole, Conor; Slaymaker, Rachel
• Is Part Of: Venture capital. Volume 22:Issue 3(2020)
• Page Start: 239
• Page End: 259
• Publication Date: 2020-07-02
• Subjects: SMEs -- financing constraints -- investment -- Ireland -- market failures; Venture capital -- Periodicals; Entrepreneurship -- Periodicals; 332.041
• DOI: 10.1080/13691066.2020.1771826
• Languages: English
• ISSNs: 1369-1066

Abstract

ABSTRACT: In this paper, we use novel firm-level survey data on investment expenditure for Irish SMEs to investigate the existence of investment constraints between 2016 and 2018. We model investment as a function of firms' economic fundamentals and factors affecting firms' access to finance. We use an empirical version of the traditional fundamental Q model which links investment to the marginal returns to capital. Empirically we deploy a two-stage Heckman model and include measures of financial frictions such as access to collateral, non-bank financing, internal finance and indebtedness. We find evidence that investment is substantially lower than the level suggested by economic fundamentals alone and that a considerable financing gap is evident. On average, we find that investment could be 55% higher than present if financing constraints were completely eliminated.