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Background
Background
Under-investment & Productivity Puzzle
Under-investment & Productivity Puzzle
The UK has suffered from problems of under-investment and low productivity growth for a long time. This lack of investment and growth constrains the performance of firms, the incomes of entrepreneurs, how much their workers are paid, how much money can be raised in taxes to pay for public services and the overall wealth of the UK population .
SMEs in the UK
SMEs in the UK
The UK experienced a large increase in the number of small firms in the economy over the last fifty years. As a result, around 60% of the working population rely on the small business sector for their jobs, incomes and well-being. However, despite of the overwhelming numerical dominance and contribution of SMEs to jobs and innovation, the average micro business in the UK is operating at 70% of its productive potential and operates at a scale that is well below the minimum efficient level in its industry. A big concern, that has been around since the 1930s, is that small firms may struggle to access external capital, which could be the key driver of the UK's under-investment problem which inhibits productivity growth. For many reasons, there is a significant gap in our current knowledge about the contribution of small firms to the overall performance of the UK economy and specifically how their ability to access finance influences how they contribute to productivity.
Research Questions:
Research Questions:
This research project will focus on identifying how finance problems act as a constraint on the ability of smaller firms in the UK to invest in productivity enhancing activities. It will consider the following research questions:
Are there internal behaviors that constrain small firms' willingness to engage with external capital markets?
How do external capital markets react when small firms put forward funding proposals?
Are there differences in the responses of debt and equity markets to small firms funding proposals?
How much investment does not proceed, or proceeds on a sub-optimal scale, due to funding constraints?
What is the precise nature of the opportunities for productive investment that are capital constrained?
What is the appropriate public response that would fill these productivity enhancing investment gaps?
What types of firms are the least productive and what is the root cause?
Project Plan:
Project Plan:
The project is structured in 5 working packages, that tackles the specific financing and investment problems faced by unique groups of small (and young firms):
- Work Package 1 -- Core Debt Funding and Investment
It covers the financing needs of SMEs, looking at micro, young and knowledge intensive firms, with a focus on internal finance and debt. It explores behavioral impacts on borrowing behavior.
- Work Package 2 -- New Forms of Finance and Financial Institutions
It explores the impact of changes in technology and new market entrants on debt financing, looking at the (geographic) impact of fintech, challenger banks, not-for-profit, and P2P lending. It explores all SMEs with a focus on micro, young, social enterprise and firms in peripheral regions.
- Work Package 3 -- Early Stage Equity Capital
Having looked at debt, this work package explores early stage equity, and the provision of finance by business angels, VCs and equity crowd funding platforms, identifying any equity gaps and feeding results into changing policy. It focuses on innovative, knowledge intensive, and growth orientated firms that are more likely to seek equity funding, and who are key to innovation driven productivity growth.
- Work Package 4 -- Later Stage Equity Capital
It explores later stage equity finance from venture capital and private equity funds, and how it supports innovative, knowledge intensive and growth orientated firms.
- Work Package 5 -- Capital Constraints, Under-investment and Productivity
At this stage, we integrate the project, exploring capital constraints, under-investment and productivity across all firms , regions and forms of financing.
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