Understanding how constraints on access to finance and under-investment impact on productivity growth in smaller firms

Description

The average micro business in the UK is operating at 70% of its productive potential and operates at a scale that is well below the minimum efficiency level in its industry. This represents a missed opportunity and a drag on the economy given the overwhelming numerical dominance and contribution of SMEs to jobs and innovation. More than 1 in 10 small businesses who apply for external funds face constraints and 72% are so scarred by their rejection that do not make further applications. Problems with SME's access to finance is therefore a key driver of the UK's under-investment problems which inhibits productivity growth.

This research will focus on identifying how finance problems act as a constraint on the ability of smaller firms in the UK to invest in productivity-enhancing activities.

The project work packages will consider the following research questions:
1. Are there internal behaviours that constrain small firms' willingness to engage with external capital markets?

2. How do external capital markets react when small firms put forward funding proposals?

3. Are there differences in the responses of debt and equity markets to small firms funding proposals?

4. How much investment does not proceed, or proceeds on a sub-optimal scale, due to funding constraints?

5. What is the precise nature of the opportunities for productive investment that are capital constrained?

6. What is the appropriate public policy response that would fill these productivity-enhancing investment gaps?

7. What types of firms are the least productive and what is the root cause?

Impact

To ensure the project helps improve outcomes, its design has been co-produced with policymakers in BEIS. The project connects to the wider body of research being undertaken across the ESRC’s Productivity Theme, and extensively engage with funders and policymakers at the UK and devolved levels. A unique feature of this project is the teams’ close working relationship with research users and our ability to input high-quality evidence in real-time as they develop policy in the post-Covid recovery period.

Project website

https://www.ukri.org/news/esrc-invests-11-million-to-tackle-productivity-puzzle/