Innovation and borrower discouragement in SMEs

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Abstract

In this paper, we investigate whether innovative small and medium sized enterprises (SMEs) are more likely to be discouraged from applying for external finance than non-innovators. These so-called discouraged borrowers are credit worthy SMEs who choose not to apply for external finance despite the fact that this is needed. We find that SMEs undertaking pure product and joint product and process innovation have a significantly higher incidence of borrower discouragement than non-innovative counterparts. Moreover, radical and incremental product innovators are more likely to be discouraged relative to non-innovative counterparts. Innovative activity can increase borrower discouragement for a myriad of reasons including fear of rejection, reluctance to take on additional risk, negative perceptions of the funding application process and perceived negative economic conditions. Overall, our results suggest a need for targeted policy interventions in order to alleviate borrower discouragement of innovative SMEs, as well as a closer alignment between innovation and SME finance policy.
Original languageEnglish
Number of pages29
JournalSmall Business Economics
VolumeFirst Online
Early online date11 Jan 2022
DOIs
Publication statusE-pub ahead of print - 11 Jan 2022

Keywords

  • Innovation
  • SMEs
  • Discouraged borrowers
  • Access to finance
  • Public policy

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