The Impact of Financial Constraints on Firm Survival and Growth

Observatoire Français des Conjonctures Économiques
Journal of Evolutionary Economics (Impact Factor: 1). 02/2008; 18(2):135-149. DOI: 10.1007/s00191-007-0087-z
Source: RePEc


We propose a new approach for identifying and measuring the degree of financial constraint faced by firms and use it to investigate
the effect of financial constraints on firm survival and development. Using panel data on French manufacturing firms over
the 1996–2004 period, we find that (1) financial constraints significantly increase the probability of exiting the market,
(2) access to external financial resources has a positive effect on the growth of firms in terms of sales, capital stock and
employment, (3) financial constraints are positively related with productivity growth in the short-run. We interpret this
last result as the sign that constrained firms need to cut costs in order to generate the resources they cannot raise on financial

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Available from: Stefano Schiavo
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    • "The financial status of a firm not only influences its prospects for survival but also the extent of its growth (Musso and Schiavo, 2008; Carreira and Silva, 2010). Becchetti and Trovato (2002) note that access to external financing (leverage, credit rationing) limits the growth of smaller businesses, while it is neutral for the growth of larger firms. "
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    DESCRIPTION: This paper highlights how the heterogeneity of manufacturing firms impacted their performance and survival during the "Great Recession". The findings indicate that firms that assumed a strategically proactive and innovative strategy in the pre-crisis period showed better economic performance during the crisis in terms of both sales and value added. The evidence also shows that the youngest firms and those that had a lower level of financial exposure were favored in terms of performance. Finally, the results also confirm the increased importance of different technological regimes. In contrast, survival estimates demonstrate the non-significance of pre-crisis strategic profiles: ceteris paribus, the results indicate that the most innovative, internationalized and dynamic firms did not register a greater likelihood of survival than other businesses. This result casts doubt on the efficiency and direction of the selection process.
    Full-text · Research · Nov 2015
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    • "On the one hand, whether 'financing constraints matter for R&D' (Brown, Martinsson, and Petersen 2012) has been found to be dependent on firms' structural characteristics (size and age, in particular) and R&D financing strategies (internal vs. external), as well as quite variable across different temporal and geographical empirical settings (Himmelberg and Petersen 1994; Harhoff 1998; Mulkay, Hall, and Mairesse 2000; Bond, Harhoff, and Van Reenen 2005; Cincera and Ravet 2010; Brown, Martinsson, and Petersen 2012). On the other hand, the 'more money, more innovation' story (Hottenrott and Peters 2012) has also been questioned, by pointing to a possible beneficial impact of financing constraints on the selection of more efficient innovative projects (Musso and Schiavo 2008; Almeida, Hsu, and Li 2013) – that is, 'less money, better innovation' – and to a possible reverse impact of innovation on financing constraints, due to the riskness and information problems the former entails (Hajivassiliou and Savignac 2007; Hottenrott and Peters 2012; Lahr and Mina 2013) – that is, 'more innovation, less money'. A similar mismatch between theory and empirics can be found with respect to the policy measures to address the market failure embedded in the relationship between financing constraints, R&D investments and innovative performances: spanning from R&D subsidies to tax incentives, passing through regulatory changes in the fiscal and legal environments to improve the functioning of financial and capital markets (Hervás et al. 2013; Moncada-Paternò-Castello et al. 2014). "
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    ABSTRACT: The relationship between financing constraints, investments in research and development (R&D) and innovative performances has recently attracted renewed attention in the aftermath of a financial crisis that has led to problems of access to the credit on which innovation activities crucially rely. In spite of past developments in the theoretical analysis and in the data and methodologies for empirical investigation, some issues have remained unexplored to date. In this introduction to the special issue, we examine the contribution of the papers it contains, which provide new conceptualisations and empirical evidence at the firm level for Europe. Most previous research results, which were mainly based on extending models of financing constraints and physical investments to R&D investments, are confirmed, while new insights about this relationship are uncovered, in terms of the structural characteristics of the constrained firms, of the industries in which they operate, of their innovative activities and of the innovation outcomes they achieve.
    Full-text · Article · Sep 2015 · Economics of Innovation and New Technology
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    • "Successful innovation, capital intensity, profitability and productivity usually lead to a longer lifespan for a firm (Audretsch, 1991; Bellone, Musso, Nesta, & Quéré, 2008; Fotopoulos & Louri, 2000). In contrast, financial constraints (Bridges & Guariglia, 2008; Headd, 2003; Musso & Schiavo, 2008), as well as costs of innovation that are beyond a company's means (Boyer & Blazy, 2013) increase the likelihood of exit. "
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    ABSTRACT: This paper contributes to the growing body of business survival literature that focuses on regional determinants of the hazard faced by firms. Using parametric survival analysis, we test the effects of regional innovation on exit likelihood in the US computer and electronic product manufacturing dur- ing the 1992–2008 period. The novelty of our approach is in conditioning the effects of metropolitan innovation on firm size. Estimation results suggest a negative relationship between metropolitan patenting activity and survival of firms that started with 1–3 employees. This effect decreases if companies grow. Establishments with more than 4 employees at start-up are insensitive to metropolitan innovation, although size of firms that started with 4–9 employees improves their survival chances. These findings indicate that local knowledge spillovers do not translate into lower hazard. The negative relationship indicates either a creative destruction regime or decisions of entrepreneurs to shut down existing ventures in order to pursue other opportunities.
    Full-text · Article · Oct 2014 · Small Business Economics
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