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)