Access to Finance of Innovative SMEs

This chapter surveys the theoretical literature on the financial constraints affecting small and medium-sized enterprises (SMEs) and then briefly introduces the reasons supporting government intervention to sustain the companies most at risk of credit rationing: new firms and small firms with innovative business plans, in the early stages of their development. The focus here is mainly on SMEs, although the financial constraints on innovative operations also affect larger firms.Innovation is generally considered one of the main drivers of economic growth, both in terms of its impact on the individual firm’s performance and at the aggregate level, through innovation’s effects on a country’s competitiveness and thus, in the final analysis, on the economic growth rate .The European Commission has attributed Europe’s unsatisfactory economic growth to a lack of innovation; given the decisive role of innovative business, it thus becomes necessary to create a favourable environment for the launch and growth of innovative firms, especially SMEs, by removing the constraints which may reduce their numbers, amongst which problems relating to access to finance are particularly significant. This chapter discussing innovative firms’ difficulties in obtaining funds comprises different sections. In the first one, the emphasis is on the financial sustainability of the growth of innovative new firms, and we will trace the operating risk and financial risk profiles which can be associated to each of the different stages in these firms’ life cycle. The second section will investigate the market failures related to the capital market imperfection correlated to the risk and profitability characteristics of the innovative project. The conclusion of this part underlines the fact that financial theory provides evidence as to how different forms of financing contracts, financial intermediaries and the capital markets can reduce these imperfections. The third one discusses the usefulness of applying the financial growth cycle approach, developed in corporate finance studies, to innovative firms to find out whether the hierarchy in sources of finance is different for small innovative firms