Access to Finance and Innovation: The Case of EU SMEs

By: Diana Petravicjusa '15

This study aims to further our understanding of channels through which access to finance impacts innovation. Particularly, we focus on small and medium enterprises (SMEs) as a potentially significant channel. SMEs are expected to be especially sensitive to changes in access to finance due to limited financing options compared to large enterprises. Hence, we hypothesize that incremental improvements in access to finance can stimulate SMEs to increase innovative activities all else equal. In order to test our hypothesis we use micro level data on European SMEs with an observable propensity to innovate displayed by their output of inventions. We assume that a higher output of inventions is strongly associated with higher innovativeness of the firm. We use data on SME patenting activities as a measure of invention output and a European Commission Access to Finance Index (SMAF) as the main measure of SME access to finance. Our results indicate that changes in access to finance are expected to translate into a higher innovative output by EU SMEs after three years. Given our short term measures and outlook, we conclude that external financing is most significant for sustaining R&D operations and patent acquisition.

This honors thesis may be read in its entirety at Digital Commons @ Connecticut College.

Related Fields: Economics