Estimating an SME investment gap and the contribution of financing frictions. ESRI WP589, March 2018

In this paper, we use firm-level survey data to explore the determinants of SME investment activity and the extent to which observed investment is in line with that suggested by economic fundamentals. In contrast to previous literature which has focused on whether investment gaps exist at a more aggregate level, we find evidence that for SMEs actual investment is below what would be expected given how companies are currently performing. The estimated magnitude of this investment gap is economically meaningful at just over 30 per cent in 2016. We explore the extent to which the gap is explained by financial market challenges such as access to finance, interest rates, and the availability of collateral. Financing frictions are found to account for a moderate share of the overall investment gap (between 10 per cent and 20 per cent of the gap)

Fast Bayesian parameter estimation for stochastic logistic growth models

The transition density of a stochastic, logistic population growth model with multiplicative intrinsic noise is analytically intractable. Inferring model parameter values by fitting such stochastic differential equation (SDE) models to data therefore requires relatively slow numerical simulation. Where such simulation is prohibitively slow, an alternative is to use model approximations which do have an analytically tractable transition density, enabling fast inference. We introduce two such approximations, with either multiplicative or additive intrinsic noise, each derived from the linear noise approximation of the logistic growth SDE. After Bayesian inference we find that our fast LNA models, using Kalman filter recursion for computation of marginal likelihoods, give similar posterior distributions to slow arbitrarily exact models. We also demonstrate that simulations from our LNA models better describe the characteristics of the stochastic logistic growth models than a related approach. Finally, we demonstrate that our LNA model with additive intrinsic noise and measurement error best describes an example set of longitudinal observations of microbial population size taken from a typical, genome-wide screening experiment.Comment: 24 pages, 5 figures and 2 table

Financial Structure and Diversification of European Firms. ESRI WP492, September 2014

Small and medium enterprises have been shown to rely mainly on banks for funding and, unlike larger firms, rarely have direct access to capital markets. This paper looks at the extent to which SMEs avail of a wider range of funding options and how their use differs across firms and countries. Using the Survey of Access to Finance in Europe (SAFE) covering sixteen Euro Area countries, we find that firms are currently using two or three sources of finance to fund their firm’s operations and have had previous experience of other types of funding. There are some noticeable differences across countries with funding types in peripheral economies generally being less diversified. Differences across firm size and age groups are more marked than cross-country variation, with smaller and younger firms significantly more reliant on a limited set of finance types and older, larger firms having more diversified financial structures. Looking at individual sources of financing, we find that trade credit and informal sources of finance are extremely prevalent across all countries, with Irish firms being particularly likely to use them as sources of funding

SME Recovery Following a Financial Crisis: Does Debt Overhang Matter?. ESRI WP491. September 2014

The years before the financial crisis saw a dramatic build-up in private debt levels in several countries and this increase was particularly marked in Ireland. In this paper, we look at whether outstanding debt taken out by small and medium sized enterprises in Ireland constrains current performance. We find that the level of debt is generally associated with positive firm performance, facilitating growth and investment. Higher debt burdens (measured as the ratio of debt to turnover), on the other hand, have significant negative effects on all measures of firm performance, in particular investment, employment and indicators of financial distress

Cost of doing business during COVID-19: SME investment in public health compliance. ESRI Working Paper No. 701 May 2021.

In this paper, we use a novel survey module to consider investment in health-related expenditures by SMEs following the onset of the COVID-19 pandemic in Ireland. Using a unique dataset designed to capture expenditure on public health measures, we explore the heterogeneity in expenditure across firms and explore its determinants using traditional models. We find that 86 per cent of SMEs invested in health measures with a mean investment of =C15,500 and a median of =C3,500. Nearly all investment was financed by internal funds. Health investments are uncorrelated with economic performance and financial factors, in contrast to traditional models of investments. This highlights the random nature of the COVID-19 shock

The determinants of SME capital structure across the lifecycle. ESRI WP614, February 2019

While differences in capital structure between large and small firms have been extensively researched, relatively less empirical evidence is available explaining cross country differences in the capital structure of SMEs over the life cycle. This is an important gap as many of the theoretical predictions on financing requirements and access can be linked to firm age. In this paper, we explore the determinants of SME capital structure across the age distribution of firms using firm-level panel data for 15 European countries. Our key findings demonstrate the existence of a non-linear relationship between age and capital structure that differs markedly across countries. We also find that firm level collateral and liquidity play a role in determining the age-debt relationship. Finally, we find that the age-debt relationship depends on the country level financial structure with more stock market financing reducing firm leverage disproportionately for young firms while foreign bank lending and bank concentration both increase firm leverage across the lifecycle

COVID-19 pandemic and SMEs revenues in Ireland: What’s the gap? ESRI QEC Special Article September 2020.

New ESRI research has found two-in-five micro-sized firms and one-in-two small and medium-sized firms faced a revenue shortfall in the main COVID-19 lockdown period from March to June 2020

SME investment determinants and financing constraints: A stochastic frontier approach. ESRI Working Paper 699 April 2021.

In this paper, we explore the link between SME investment, firm economic characteristics, and the presence of financing constraints during the post-2008 crisis recovery period in Ireland. We use novel survey data between 2016 and 2018, which disaggregates investment by asset type and allows a granular assessment typically not present in the existing literature. Our approach links investment to the marginal product of capital using a stochastic frontier model to explore, and measure, the presence of constraints. We also test whether liquid assets, indebtedness and investment dissatisfaction impact SMEs investment. We find a clear link between investment and its marginal product with elasticities of between 0.55 and 0.65; a one per cent increase in marginal product leads to a 0.55-0.65 per cent increase in investment. The investment efficiency estimates obtained show the presence of financing constraints. We find evidence of both internal and external finance constraints explaining the investment efficiency of small fixed assets. Higher collateral availability contributes to improve investment efficiency for all fixed assets

Exploring SME Investment Patterns in Ireland: New Survey Evidence. Quarterly Economic Commentary Special Article, Autumn 2018.

An empirical profile of SME investment in Ireland is critical to understanding the growth possibilities and productive capacity of Irish indigenous enterprises. However little is known about SME investment activity outside the more aggregate information. This paper uses new survey evidence compiled as part of the Department of Finance SME Credit Demand Survey to profile the types of assets SMEs are investing in, how firms are financing these investments and what barriers firms face to investment. We provide a detailed exploration of the trends across firms looking at different size classes, age groups, exporting status and sectors. A number of findings emerge. We find that two in every three SMEs invested in their staff; one-in-two invested in fixed assets; and less than one-in-ten invested in intangible assets in 2016. SMEs were in general satisfied with their investment levels or their current capacity with only one-in-five facing a capital gap. For those with perceived insufficient investment, a lack of internal funds, rather than access to external finance, was identified as the main reason. Finally, SMEs reported having significant liquidity levels in 2016. These findings suggest that any perceived sluggishness in borrowing or investment appetite could potentially be demand-side in orientation