Mature micro-firms and their experience of funding shortages

Abstract

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.