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Innovation and borrower discouragement in SMEs
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Innovation and borrower discouragement in SMEs
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Journal Article
Innovation and borrower discouragement in SMEs
2022
Overview
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 within innovative SMEs, as well as a closer alignment between innovation and SME finance policy.Plain English SummaryInnovative SMEs play a crucial role in driving technological change and productivity growth. Therefore, understanding the factors shaping access to finance for innovative SMEs is of crucial importance to the economy. We investigate the potential impact of innovation activity on the incidence of borrower discouragement, credit worthy firms who choose not to apply for external finance despite the fact that it is required. The results of our empirical investigation suggest that SMEs undertaking pure product and joint product and process innovation have a significantly higher incidence of borrower discouragement than non-innovative counterparts. The principal implication of this study is that innovation is a factor, which self-limits access to finance for innovative SMEs. We offer recommendations to mitigate borrower discouragement in this context.
Publisher
Springer Nature B.V
