Firm Growth, Capital Choice Preferences, and Impact on Performance: Evidence from the SME Industry
53 Pages Posted: 20 Aug 2015
Date Written: August 20, 2015
Small and Medium Enterprises (SMEs) have differential preference of various funding sources depending on the stage of growth cycle they are in. Quite a few researches have been carried out to decode the link between various funding sources and performance. This study differs from existing literature by studying the impact of funding sources on performance through various growth stages. The paper also adds to the existing literature on SMEs’ preferences towards various funding sources. We have used six years’ (2007-2012) data for 287 manufacturing firms. Based on their growth, we have divided them into three groups, namely, low, moderate and high growth firms. Path modeling technique is used to study the intertwined relationship among the variables. We also develop a growth-performance meter which is a scale that measures the impact of funding sources on performance and efficiency of SMEs at different growth stages. The results show that, internal finance, and institutional finance have a significant role in enhancing the performance of low growth firms. But, the role of institutional finance fades away as the firm move up the growth cycle. It has a negative impact on performance of high growing SMEs. Alternately, non-institutional finance contributes to better performance of high growing SMEs establishing the importance of external debt to high growing firms. Volatile earnings of high growing firms is seen as a reason to cause procedural inconvenience and delay in obtaining formal institutional loans at right time to enable them to grab opportunities. Conversely, volatility (taking risk) is found to increase its performance and efficiency. The positive impact of collateral asset on institutional borrowing also indicates that only secured loans are available to risk taking high growth firms which falls as a constraint. It provide implication to policy makers to sort out a way to make formal institutional finance available to high growing firms to enable them take risk and grow faster.
Keywords: Growth Cycle, Institutional Finance, Internal finance, Performance, SMEs.
JEL Classification: L25, L26, G21
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