Analysing SME investment, financing constraints and its determinants. A stochastic frontier approach

Abstract

In this paper we explore the link between Small and Medium Enterprises (SMEs) investment and their economic characteristics, together the presence of financing constraints during the post-2008 crisis recovery period. We use novel survey data for Irish SMEs between 2016 and 2018, which disaggregates investment by asset type and allows a granular assessment typically not present in the existing literature. Our approach links investment to the marginal product of capital using a stochastic frontier model to explore and measure the presence of constraints. We also test whether liquid assets, indebtedness and investment dissatisfaction impact SMEs investment constraints. We find a clear link between investment and its marginal product with elasticities of between 0.55 and 0.65; indicating that a unit per cent increase in marginal product leads to 0.55–0.65 increases in investment. The investment efficiency estimates obtained show the presence of financing constraints. We find evidence of both internal and external finance sources explaining investment efficiency of small fixed assets. Higher collateral availability contributes to improve investment efficiency for all fixed assets.