Investing in R&D: small- and medium-sized enterprise financing preferences

Abstract

This work adds to our understanding of financing decisions among owners of small- and medium-sized enterprises (SMEs), with particular reference to SMEs that conduct research and development (R&D). The work examines, conceptually and empirically, the forms of financing that are preferred by primary owners of SMEs that invest in R&D relative to preferences of owners of SMEs that do not conduct R&D. The work develops a conceptual rationale as to why SMEs engaged in R&D might hold particular preferences with respect to preferred sources of financial capital. Empirical analysis draws on large-scale survey data of actual applications for financing (as opposed to financing received) as reported by business owners and controls for systemic factors that include firm size and sector. Findings include that financing preferences do not follow a ‘one-size-fits-all’ prescription. Rather, preferences vary according to growth goals, the nature of ownership, age of firm, firm size and sector; however, it was also clear that firms that invest in R&D are much more likely to seek equity financing than otherwise comparable firms that do not invest in R&D.