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Financing new venture exporters

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Abstract

This paper investigates the demand for, and access to, financing for young small and medium-sized enterprises (SMEs). The work compares, theoretically and empirically, two sets of new firms—those that export and those that do not export—as to the frequency with which they seek and obtain external financing. The work hypothesizes that new growth firms and new exporter firms are especially likely to seek external financing yet less likely to obtain financing. Empirical findings confirm these expectations, demonstrating that young growth firms were more likely than non-growth firms to seek all forms of capital and exporters were particularly likely to apply for equity and trade credit. Commercial lenders were less likely to approve loan applications from early stage growth firms, and especially so for applications from young, growth-oriented SME exporters. The implications of these results for research and public policy are discussed.

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Notes

  1. Knight and Cavusgil (1996) was a conceptual paper that derived characteristics of born-global firms based on findings from other studies. Reuber and Fischer (1997) based their work on a sample of software firms with fewer than 200 employees. Their sample included both INVs and more established firms. They found that firms with more internationally experienced management teams used more foreign strategic partners and exported sooner after start-up. Spence et al. (2007) drew their findings from a sample of 3,000 firms founded between 2001 and 2004, of which 194 were active exporters.

  2. For example, in The SME Financing Gap (vol. I), Theory and Evidence, The OECD states “The lack of funding available from the financial sector for small and medium-sized enterprises (SMEs) is known as the ‘financing gap’” (http://www.oecdbookshop.org/oecd/display.asp?K=5L9K8KSB75ZR&LANG=EN).

  3. Where possible, symbols used here are consistent with those used by Besanko and Thakor in order to allow comparisons with their model.

  4. Project risk could, alternately, be expressed in a more complex fashion using a cumulative probability distribution; however, this simply adds complexity to the model without substantive changes to the implications.

  5. A more comprehensive description of the data collection methodology is available from the SME Financing Data initiative, Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2006 website: http://www.sme-fdi.gc.ca/epic/site/sme_fdi-prf_pme.nsf/en/01561e.htm).

  6. There is a philosophical issue related to when a business actually begins. Reynolds and Miller (1987) wrote about this challenge as follows:

    When is the attempt to initiate an economic enterprise considered? When incorporation occurs? When business cards are printed? When loans are sought? When income is first received? When the first employee is hired? Each criterion has its own set of problems in defining a population of new firms.

    More than 20 years later, the problem persists: Reynolds (2009) states that there remains “no consensus, on either a conceptual or operational basis, about what comprises a firm birth.” A further complication was raised by Zahra (2005) who observed that new firms may also be created from spin-offs from existing companies or as an outcome of restructuring.

  7. A second, less conservative definition of young exporter embraces firms that started trading goods or services in 2000 or later and for which exports account for at least 10% of sales revenues. Within the sample, 263 of the 2,882 young firms would be young exporters according to this alternative definition. This represents approximately 16,394 new businesses in the population among the estimated 328,550 firms established between 2000 and 2004, an incidence rate of 5.0%. This is virtually identical to the incidence rate of similarly defined exporters among established firms. Of course, it is also likely that many young exporters do not survive to become “established” firms and not all exporters among established firms were young exporters; however, these findings provide strong evidence that young exporters are relatively not uncommon.

  8. The majority of the balance of firms sought leasing and government grants.

  9. One hundred forty cases were missing data.

  10. In the interests of space, the results are shown here only for the case of intensive exporters. The complete results are voluminous and are available from the authors on request.

  11. Probability of one spuriously non-significant result among seven independent tests at a 5% level of significance.

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Authors and Affiliations

  1. University of Ottawa, Ottawa, Canada

    Allan Riding, Barbara J. Orser & Martine Spence

  2. Government of Canada, Ottawa, Canada

    Brad Belanger

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  1. Allan Riding
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  2. Barbara J. Orser
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Correspondence to Allan Riding.

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Riding, A., Orser, B.J., Spence, M. et al. Financing new venture exporters. Small Bus Econ 38, 147–163 (2012). https://doi.org/10.1007/s11187-009-9259-6

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