Innovation, SMEs and the liability of distance: the demand and supply of bank funding in UK peripheral regions

Abstract

This paper considers geographical variations in the demand and supply of bank finance for innovative firms in the UK. It uses a detailed survey on the finances of almost 40,000 UK Small and Medium Sized Enterprises for 2011 – 2013 to investigate both the extent and type of applications for bank finance by innovative firms in peripheral regions, whether funders accept their applications and whether acceptance rates reflect objective criteria, such as credit scores, or their location. The paper finds evidence of higher demand for bank finance for innovative firms in peripheral areas, but that these firms are more likely to be discouraged from applying. However, there is strong evidence that innovative firms in peripheral regions are more likely to have their applications for finance rejected, even when controlling for factors such as credit score. The findings suggest that geography matters in the financing of innovative firms and firms in peripheral areas may suffer a “liability of distance” which potentially reinforces regional disparities. The implications of these findings for public policy are outlined.