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Does Access to External Finance Affect Development of Small and Medium Enterprises and Economic Growth?

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  • Dominykas Poderys

    (Kaunas University of Technology, Lithuania)

Abstract

Small and medium-sized enterprises (SMEs) have become increasingly important in nowadays society as providers of employment opportunities and key players for the well-being of local and regional communities. Access to external funding is one of the largest problem facing SMEs in European Union (EU). Entrepreneurs face difficulties implementing their development plans while creating new businesses, adopting innovation, etc. Scientists also argue that without external funding business cannot achieve good financial performance results. The European Commission (EC) is implementing a number of programs specifically designed to improve the financial environment for SMEs in Europe. Since the financial markets have failed to provide SMEs with the finance they need, the EC has developed and funded various financial instruments. According to the scientists, creating the appropriate conditions for the development of SMEs in each country would possibly reduce the unemployment rate, accelerate country's economic growth, help to overcome social problems, and create competitive environment. Given the current economic situation in the EU countries, the subject's relevance is obvious underlying the importance to assess whether a better access to external funding sources would provide benefits to the countries at micro and macro levels. The main empirical findings of this study confirm the results of early empirical studies that a better access to external funding is an important growth factor for SMEs as well as for the whole economy. The panel regression analysis results suggest that a better access to banks' funding has a positive and statistically significant effect on country's economic growth as well as on SMEs development, however, a better access to equity finance (venture capital, business angels' investment) has no statistically significant effect. While SMEs represent over 99% of businesses in the EU so it is crucial to support their growth and innovation as well as improve the financing environment for small businesses in Europe.

Suggested Citation

  • Dominykas Poderys, 2015. "Does Access to External Finance Affect Development of Small and Medium Enterprises and Economic Growth?," European Journal of Business Science and Technology, Mendel University in Brno, Faculty of Business and Economics, vol. 1(1), pages 43-53.
    • Handle: RePEc:men:journl:v:1:y:2015:i:1:p:43-53
    DOI: 10.11118/ejobsat.v1i1.37
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    References listed on IDEAS

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    8. Karthik Krishnan & Debarshi K. Nandy & Manju Puri, 2015. "Does Financing Spur Small Business Productivity? Evidence from a Natural Experiment," The Review of Financial Studies, Society for Financial Studies, vol. 28(6), pages 1768-1809.
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    More about this item

    Keywords

    small and medium-sized enterprises; access to finance; economic growth; the European Union;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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