SMEs, Financial Constraints and Growth

22 Pages Posted: 7 Jan 2015

See all articles by Ryan Banerjee

Ryan Banerjee

Bank for International Settlements (BIS)

Date Written: December 2014

Abstract

The SME sector is often hailed as an important engine of economic growth. But recent research suggests that young rather than small firms are the main contributors to employment growth. This paper shows that young firms are also key contributors to profit growth across advanced economies. It them examines the impact of financial constraints on profitability across the age distribution of SMEs. We find that start-ups which report finance as their greatest constraint receive smaller new loans and evidence that financing constraints reduce start-up profitability. We do not find a similar relationship for older SMEs in pre-crisis data. Therefore, policy initiatives which ease financing constraints for start-ups could play an important role in boosting economic growth. However, following the protracted financial crisis in Europe, we also find that financial constraints reduced profitability in the cohort of more mature firms that were start-ups just before the financial crisis.

Keywords: firm age, firm size, SMEs, financial constraints, economic growth

JEL Classification: E22, G30, L16, O16

Suggested Citation

Banerjee, Ryan, SMEs, Financial Constraints and Growth (December 2014). BIS Working Paper No. 475, Available at SSRN: https://ssrn.com/abstract=2542219

Ryan Banerjee (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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