SME investment determinants and financing constraints: A stochastic frontier approach. ESRI Working Paper 699 April 2021.

Martinez-Cillero, Maria and Lawless, Martina and O'Toole, Conor (2021) SME investment determinants and financing constraints: A stochastic frontier approach. ESRI Working Paper 699 April 2021. [Working Paper]

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Abstract

In this paper, we explore the link between SME investment, firm economic characteristics, and the presence of financing constraints during the post-2008 crisis recovery period in Ireland. We use novel survey data 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. We find a clear link between investment and its marginal product with elasticities of between 0.55 and 0.65; a one per cent increase in marginal product leads to a 0.55-0.65 per cent increase in investment. The investment efficiency estimates obtained show the presence of financing constraints. We find evidence of both internal and external finance constraints explaining the investment efficiency of small fixed assets. Higher collateral availability contributes to improve investment efficiency for all fixed assets.

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