Financing constraints and SME growth: the suppression effect of cost-saving management innovations

A constrained access to external financing has a negative effect on firm growth. This is even more problematic for SMEs, as smaller firms are more prone to having financing constraints. Drawing on the resource dependence theory, we argue that firms with constrained access to external financing seek to become less dependent on their access to external financing. Firms can introduce cost-saving management innovations, which are innovations in the form of new organizational processes, practices and structures with the goal of reducing the firm's costs and increasing its efficiency. Relying on survey data of 2,973 observations of SMEs among 34 European countries, our results show that SMEs with constrained access to external financing are indeed more likely to introduce such cost-saving management innovations. We also find evidence that cost-saving management innovations positively affect firm growth. Hence, we find a positive indirect effect of constrained access to external financing on SME revenue growth through cost-saving management innovations. This positive indirect effect suppresses the negative direct effect of constrained access to financing on revenue growth, pointing to a potentially important role of cost-saving management innovations as a coping strategy for constrained access to external financing for SMEs. Plain English SummaryAlthough constrained access to external financing is a well-known barrier to innovation and growth, we find that constrained access to external financing induces cost-saving management innovations that subsequently stimulate SME growth. SMEs seek to reduce their dependence on external capital when they hold no power over external capital providers. Among our sample of 2,973 observations of European SMEs, a quarter of SMEs introduced cost-saving management innovations, which increased to one-third if the firm perceived its access to external financing as its most important problem. These innovations consequently increased revenue growth and suppressed the negative effect of a constrained access to external financing on growth. This is an important insight for managers in SMEs who seek to stimulate firm growth even when dealing with financing constraints. Policymakers may note that not all SMEs are affected equally negative by financing constraints.