Small Firm Investment Research Articles

SMEs “Growing Smart”: The Complementarity of Intangible and Digital Investment in Small Firms and Their Contribution to Firm Performance

SMEs “Growing Smart”: The Complementarity of Intangible and Digital Investment in Small Firms and Their Contribution to Firm Performance

Policy uncertainty and intellectual capital investment

ABSTRACT This paper investigates the relationship between economic policy uncertainty (EPU) and corporate intellectual capital (IC) investment. The empirical results, which are based on a wide range of econometric tests, demonstrate a negative impact of EPU on IC investment, thus lending support to the notion that EPU hinders corporate IC investment. The analysis also indicates that the negative impact of EPU on IC investment varies cross-sectionally. It is prominent only in large firms and financially constrained firms, suggesting such firms reduce or delay IC investment during heightened EPU periods. EPU does not significantly affect the IC investment in small firms and firms with less financial constraints. Our findings are broadly consistent with existing studies in the literature and remain qualitatively unchanged after a battery of robustness and endogeneity tests.

Local institutions on small firm investments: degrees of institutional persistence matter

This study investigates the influence of local institutions including corruption, administration transparency, and leadership proactivity on small firm investment. Drawing from the institutional theory, we suggest that the persistence (resistance to changes) of institutional forces is an important determinant of their effects on investment. Using a dataset of 945,725 firm observations in Vietnam from 2006 to 2015, we find that: 1) investment is a U-shaped function of corruption controls; 2) transparency has a positive effect on investment; 3) leadership proactivity can moderate the adverse effects of corruption and opaqueness in public services. This variety in the association patterns between investment and institutional forces is due to the degree of institutional persistence in local norms of doing business.

Local institutions on small firm investments: degrees of institutional persistence matter

This study investigates the influence of local institutions including corruption, administration transparency, and leadership proactivity on small firm investment. Drawing from the institutional theory, we suggest that the persistence (resistance to changes) of institutional forces is an important determinant of their effects on investment. Using a dataset of 945,725 firm observations in Vietnam from 2006 to 2015, we find that: 1) investment is a U-shaped function of corruption controls; 2) transparency has a positive effect on investment; 3) leadership proactivity can moderate the adverse effects of corruption and opaqueness in public services. This variety in the association patterns between investment and institutional forces is due to the degree of institutional persistence in local norms of doing business.

Financing constraints and small firm investment behaviour

The aim of the paper is to investigate the impact of financial constraints on investment behaviour of firms in Kosovo. This article uses data from the 2005 survey of small and medium-sized enterprises (SMEs) conducted by Riinvest Institute in order to test the investment-cash flow sensitivity hypothesis. For this purpose we use two regression techniques. First, we use ordinary least square (OLS) regression to estimate an investment equation model in order to test sensitivity of investment to cash flow. Then, we estimate a switching regression model as a robustness check in order to control for possible methodological biases of other studies. Econometric results do not support investment-cash flow sensitivity hypothesis after controlling for different sub samples of firms (i.e., firms that received a credit, firms that did not ask for credit and firms that were refused by banks) and methods.

Is the division of labor limited by the extent of the market?: evidence from the chemical industry

In the age of outsourcing, it is easy to forget that outsourcing is simply one manifestation of the division of labor. Adam Smith's dictum that the division of labor is limited by the extent of the market has created difficulties when applied to a division of labor among firms (rather than within a firm). The problems are both for analytical attempts to formalize it and for empirical attempts to test it. Bresnahan and Gambardella show that the Smith--Stigler theorem holds when the extent of the market is defined in terms of the number of users instead of simply the total size of demand; therefore, division of labor is increasing in the number of users and decreasing in the average size of users. This article provides an empirical test of Bresnahan and Gambardella's theoretical argument, using data from the chemical industry. The chemical industry shows systematic variation across technologies and countries in the extent of the division of labor in plant design and engineering. We develop an empirical model in which large firms decide whether to build plants using in-house resources or to contract out, and small chemical firms also decide whether to invest in a plant. The number of specialized suppliers of plant design and engineering services (SEFs) vary with the demand for their services. The empirical results support the predictions of Bresnahan and Gambardella. We find that the number of SEFs increases when the market expands through an increase in the number of potential buyers but not when the market expansion is due to an increase in the average size of buyers. Moreover, an increase in the share of large-firm investment decreases small-firm investment, which decreases the number of SEFs. In turn, this further depresses small firm investment. Copyright 2009 The Author 2009. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved., Oxford University Press.

A Note on Agency Conflicts and the Small Firm Investment Decision*

This paper explains how agency conflicts—and potential agency conflicts—can influence the investment decisions of small firms, and provides evidence of these effects using data from a recent survey of small firm investment practices. The survey asks business owners to identify their most important investment concern—overinvestment or underinvestment. We find that underinvestment concerns are more prevalent in growing firms, and those with concentrated ownership and control structures. Overinvestment concerns increase as firms adopt less‐concentrated ownership and control structures. These results suggest that the management challenges facing small firms shift as the degree of separation between ownership and control becomes greater.

Small firms and e-business: cautiousness, contingency and cost-benefit

This paper examines how e-business affects small firms in supply chains. Research in four UK supply chain cases, assistive/medical technology, construction, computer consumables and apparel, indicate widening gaps between large and small firm investment and strategy for exploitation of e-business. Existing models of e-business operationalisation are critically evaluated; and their appropriateness in providing insight and guidance is reflected on. While each model individually provides some useful insights, none are appropriate for examining small firm take up of e-business. Therefore a new framework is developed based on three key issues—cautiousness, contingency and cost-benefit.

Small Firm Investment and Financing Decisions: An Option Value Approach

This paper reviews and discusses recent developments undergone by investment theory, and tries to address both financial and real decisions within an uncertain environment, here, the Italian economy. According to the recent "option value" approach to investment, if differing degrees of reversibility characterize the accumulation process by groups of firms (small and larger firms), we should expect their investment decisions to differ under uncertainty. On the other hand, asset reversibility has an influence on firm financing policy, given the observed relationship between asset and liability composition. Assuming a different degree of investment reversibility for small and larger firms, we explore how they react to interest rate uncertainty using the Italian experience during the 1980s as a benchmark. The main result of this paper is that interest rate uncertainty exerts a negative influence on firms' investment demand. The relationship is stronger for large firms than for small firms. Another result is that firm leverage also shows a negative relationship with interest rate uncertainty.

BARRIERS TO INVESTMENT: THE APPRAISAL AND FINANCING OF NEW MANUFACTURING TECHNOLOGIES IN SMEs

The exploitation of new manufacturing technologies by large organisations is placing increasing pressures on the ability of SMEs to compete, since they enable large firms to compete through advantages traditionally associated with SMEs (e.g. flexibility, small production runs and specialised products). If SMEs are to maintain and improve their competitive position, a more proactive stance is required in relation to new technology investment. The identification and removal of barriers to adoption could greatly aid small firm investment in new technology. The internal investment appraisal process has been identified as one of the major barriers to the adoption of new manufacturing technologies in large firms (Price et al., 1990; Finnie, 1988). Little, however, is known about how SMEs conduct investment appraisals. Further, where SMEs seek external funds, they face additional appraisal by the funding institution. Research (Joyce et a/., 1990; Watkins and Morton, 1992) has indicated that SMEs view financing difficulties as a major barrier to investment. Given the nature of new manufacturing technologies, it is anticipated that such investments may create specific financing problems, particularly in relation to the appraisal by the financial institution. The focus of this paper, therefore, is on these two potential barriers to investment. Firstly, the paper investigates the extent to which the appraisal problems faced by large organisations are common to SMEs and establishes the extent to which the appraisal methods advocated in the literature are relevant to SMEs. Secondly, it examines external constraints on the financing of new technology investments from the firm perspective. In examining these barriers, the paper identifies the characteristics of the investment and financing decision‐making processes in SMEs. The main findings of the research project, involving case studies of 15 SMEs in the South East, are that SMEs do face problems in appraising and justifying new technology investments. However, these difficulties appear to cause fewer problems for SMEs in terms of the outcomes of the appraisal process than might be expected. Surprisingly, the financing of new technologies was not found to constitute a significant barrier to investment and few of the firms had experienced any real difficulties in raising finance for this purpose. The reasons for these apparent conditions are explored in depth and factors affecting the results are identified.

The role of venture capital in financing small business

Venture capital is a primary and unique source of funding for small firms because these firms (with sales and/or assets under $5 million) have very limited access to traditional capital markets. Venture capital is a substitute, but not a perfect substitute, for trade credit, bank credit, and other forms of financing for small firms. Small businesses are not likely to be successful in attracting venture capital unless the firms have the potential to provide extraordinary returns to the venture capitalist. This study provides an analysis of a survey of venture capital firms that participate in small business financing. The survey participants are venture capital firms that were 1986 members of the National Venture Capital Association (NVCA), the largest venture capital association in the United States. The average size of the venture capital firms responding to the survey is $92 million dollars in assets, with a range from $600 thousand to $500 million. Twenty-three percent of the respondents have total assets below $20 million, and 27% have assets above $100 million. The venture capitalists' investment (assets held) in small firms delineate the supply of venture capital to small firms. Sixty-three of the 92 venture capitalists' have more than 70% of their assets invested in small firms. The venture capitalists were asked how their investment plans might change with changes in the tax law that were projected in the spring of 1986. Fifty-four percent expected to increase their investments in small firms, and 38% did not expect to change these activities. Venture capitalists are very selective in allocating their resources. The average number of annual requests that a venture capitalist receives is 652, and the median number is 500: only 11.5 of the respondents receive more than 1,000 proposals per year.

Market Line Deviations and Market Anomalies with Reference to Small and Large Firms

Previous anomaly research may have misinterpreted corrected, for the market index, mean returns on small firms. Assuming mean-variance preferences, it is shown theoretically that corrected mean returns (i.e., market line deviations) are not indicative of the relative desirability of increasing the proportional investment in small firms. The correct improvement criterion is derived and estimated. Tests indicate that the value-weighted market index is not significantly improved with greater weight on small firms, in the average month. When seasonality is considered, the observed performance improvements due to small or large firms are significant in some months, but the required portfolio position is unclear. If a case exists for a small firm anomaly in January, it probably exists in other months and it also exists for large firms. It is doubtful whether such an anomalous stock market exists.