Project 2 presentation. ERC Projects 2016 - 2018 by Nicos Nicolaou

Access to finance and international expansion

Professor Nicos Nicolaou

• International expansion is critical for firm survival and growth (Oviatt

and McDougall, 1995).

• However, there has been limited research on how lack of finance

can impact SME aspirations for exports (Cassar, 2004; Crick,

2004).

• We also know very little about SME exports in one of the world’s

fastest growing markets, China.

• Do firms with an aspiration to expand into international markets find

finance more difficult to access?

Overview

• Our sample includes proprietary data of over 4,000 middle market firms

(interviews with senior executives) from the UK, Germany, France and Italy.

• Despite their importance, there have been very few studies on middle

market firms.

• Our data enables us to conduct a comparative analysis of the four largest

European economies and has significant implications for policy makers who

aim to develop the British Mittelstand.

• As John Longworth said at the 2015 annual BCC conference, “only if we fix

our business finance system will we have a British, home-grown Microsoft,

Google, Samsung, Miele, Siemens, L’Oreal or Tata in the years ahead”.

Overview

• Middle market firms

• Brief theoretical overview

• Data / questions

• Background analysis

Structure

• Very few studies have focused on the mid-market sector (Bresnen

and Fowler, 1996; Zahra, Neubaum, and Huse, 2000), despite its

importance to the European economy (EVCA, 2013; HSBC, 2015).

• Such companies make a major contribution to national economies,

adding over a trillion euros to Europe’s GDP and employing tens of

millions across the continent (EVCA, 2013; HSBC, 2015).

• Middle market is the engine of the UK national economy – “hidden

champions” (Simon, 2009)

• Agile enough to manage change and do not suffer from the

structural constraints and organizational inertia that characterise

large firms.

Middle Market firms

• “Middle market companies are the speedboats of our economy, in

contrast to Fortune 500 companies that act more like battleships

and aircraft carriers. Their smaller size of middle market companies

means they can change direction faster, adapt more aggressively,

innovate more nimbly, and potentially generate outsized returns to

their investors”.

• “The “middle market” is to the U.S. economy what North America

was to Christopher Columbus: a giant, incredibly important,

heretofore “undiscovered” but now unavoidable and centrally

important part of the world’s landscape” (Maney, 2011).

Middle Market firms

• The definitions for the mid-market are as follows for each country:

• Germany: €20m - €1bn in annual turnover

• UK: €20m - €1bn in annual turnover

• France: €10m - €500m in annual turnover

• Italy: €5m - €250m in annual turnover

• There are about 145,000 middle market firms in the EU4 – only 1.5% of total companies.

• They contribute one third of private sector GDP; 29% of employees and 31% of revenue (Malshe, 2013).

Middle Market firms

• There has been limited research on how lack of finance can impact SME

aspirations for exports (Cassar, 2004; Crick, 2004).

• At a theoretical level, studies have argued that in the presence of sunk

entry costs, only those firms without financial constraints can become

exporters (Melitz, 2003, Chaney, 2016).

• At an empirical level, few studies have examined the relationship between

access to finance and exporting at the firm level with some inconsistent

results.

• Greenaway et al. (2007) examined whether a firm’s financial health and

exporting were linked. No ex ante effect found.

• Bernard et al. (2010) examined the relationship between access to finance

and exporting in 28 countries in Eastern Europe and Central Asia. No

association found.

Brief theoretical background

• Bellone et al. (2010) found that firms’ financial health increased the

probability of exporting.

• Minetti and Zhu (2011) analysed a sample of Italian firms and found that credit rationed firms were less likely to export and likely to export less. (survey-based measures of access to finance).

• Mulls (2015) examined a sample a Belgian manufacturing firms and found that firms with lower credit constraints and better credit ratings were likely to export more.

Brief theoretical background

• Inconsistent results – only one study used survey based measures of access to finance.

• Examine contingencies – relationship influenced by age of firm,

industry, corporate entrepreneurship.

• Limited work on MMFs

Brief theoretical background

Descriptive statistics

Aspirations to expand in new

international markets

Is your business looking to enter new geographic markets, outside of its home country, in the next five years?In which of these markets is your business hoping to start trading?

• 66% are exporters

Exporting

WHICH MARKETS OUTSIDE HOME MARKET ARE YOUR COMPANY’S TOP 3 MARKETS FOR EXPORTS?Growth champions (reported at least 10% revenue growth), growers (reported 5-9% growth over the past year), marginal growers (1-4%) and flat or declining (reported no or declining growth).

Challenges of exporting or entering new markets

To what extent, if at all, do the following represent a challenge for you as regards exporting or entering new geographic markets?

Access to finance

Presence in China

• Brief

Operational activity in China

What presence, if any, do you have in China?

Current revenue and future forecasts in China

Reasons for staying away - China

What are the factors that currently put you off doing business in China?

• The project will examine the relationship between access to finance

and aspirations for international expansion.

• Little work on middle-market firms.

• Our data enables us to conduct a comparative analysis of the four

largest European economies and has significant implications for

understanding the British Mittelstand.

Summary