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Financial Models of Innovative Firms
04.05.2009
The International Conference dedicated to the “financing of SME – small to medium-sized – firms: a way of overcoming the economic crisis” was held in Italy, in Urbino on the 21st and 22nd of April. Organized by the Department of Economics and Quantitative Methods of the Economics Faculty of The "Carlo Bo" University in Urbino in collaboration with Regione Marche, the OECD – Organization for the Cooperation and Economic Development – and the Pesaro Urbino Chamber of Commerce. The objectives of the conference were to analyze the working of the financing of small to medium-sized firms, highlighting its role in overcoming the current economic crisis. After two full days of work, numerous analysis and working solutions emerged that are particularly applicable to the political, entrepreneurial and financial systems of Italy and America, two of the main players in overcoming the extraordinary economic and financial crisis that we are currently facing. Of particular interest were the results from the research on “Financial Models of Innovative Firms: in the case of Marche Region” done by Giorgio Calcagnini, Ilario Favaretto and Germana Giombini. Their research investigated the methods of financing adopted by a sample group of innovative firms in the Marche Region and the problems they encountered with finance institutions.
These are the main points used to identify an innovative company;
- Operates within the high technology sector
- Founded as a direct result of research
- Has a significantly large number of highly trained staff
- Invests significant resources in research and development.
Innovative firms generally have a high growth rate but, at the same time, a high level of risk.
DEFINITION OF THE SAMPLE GROUP FOR RESEARCH
From a methodological point of view, the research compared two different samples of companies: one made up of around 300 innovative firms from the Marche Region and the other from a random sample of traditional businesses in operation throughout Italy. The return rate of the questionnaires sent to the companies was approximately 22%, or more precisely 66 questionnaires from innovative firms and 44 from sample comparison business.
TYPES OF BUSINESS
89.4% of the innovative firms are limited liability companies whereas, in comparison, they are 36.4% between the traditional type.
COMPANY SIZE
The size of the innovative firms was, in general, larger than that of the traditional type. 37.7% of the innovative firms are companies with between 10-49 employees. In 72.5% of the traditional firms the numbered varied between 1-9 employees. 34.4% of the innovative firms have between 50-249 employees compared with 5% of the traditional ones.
FOUNDATION OF THE COMPANY
In terms of decades – the 1970s was the decade with the highest quantitative growth rate registered in innovative firms, which was then followed by the progressive fall which today brings us to more than 50% reduction. The sample group did not include start-up companies.
SECTORS
In which sectors are they based?
58.5% of innovative firms are found in the manufacturing sector. Only 12.3% in the technical, scientific and professional services.
EXPORT
Innovative firms are more oriented towards export than the traditional type. In the sample group more than 44% export nothing, in the innovative group this fell to 5%.
TYPES OF INNOVATION DEVELOPED
There are no differences between the two sample groups regarding the purchase of innovative machinery, information technology etc… aimed at innovating products and productive processes. In fact, in both cases this type of investment was registered as 16.5% of the total. Instead, relevant differences were registered between the two groups regarding development within the company (23.7% in the innovative firms and 12.4% in the traditional firms), outside the company (from 6.7% of the innovative firms to 3.1% of those traditional).
TYPES OF INVESTMENTS UNDERTAKEN
Relevant differences between the two groups were registered regarding the types of investments made for the creation of new products: in the innovative firms 7.8% is directed there against 2.9% in the traditional firms. Significant differences were noted also in the purchasing of properties and in the development of new plants: only 28.2% by the innovative firms against 43.1% by the traditional firms.
TYPES OF FINANCING
Innovative firms have resorted to over 40% equity finance and less than 60% financial debt. Traditional firms have resorted to over 80% financial debt and less than 20% equity finance.
WHICH TYPES OF FINANCING?
Which types of financing have been used by the companies? Only 7.7% of innovative firms have received long term loans, whereas this percentage reaches 55.3% in the traditional firms. 26.5% of innovative firms have received short to medium term financing in comparison to the 11.3% of traditional firms. Only the innovative firms have resorted to lines of credit (24%). There are no substantial differences regarding the use of leasing (35.8% of innovative firms to 31.6% of traditional ones have used it).
DISTRIBUTION OF THE FINANCIAL CAPITAL
79.5% of innovative firms have made use of their own capital. This percentage rises to 99% of traditional firms. Exclusively the innovative firms (20.4%) resorted to the use of venture capital.
REASONS WHY COMPANIES DO NOT INVEST IN INNOVATION
This section of the questionnaire aimed at understanding the reasons behind the lack of investments in innovation on the part of the firm begs further investigation on behalf of the researchers. It could be due to the variables on the questionnaire not being exhaustive. In fact both samples highlighted with high percentages the answer "None of the above" (58.8% innovative firms against 37.5% traditional ones) let without information the specific reasons as to why the company did not invest. Perhaps it is due to the variables on the questionnaire not being exhaustive. Nevertheless, whilst for the traditional firms 37.5% of them give the main reason as the lack of possible return on the investment to support such a growth strategy, 12.5% feel it is premature to make this type of investment, 12.3% feel that the revenue obtained would be insufficient for the company. The innovative firms gave a more varied response with 11.8% of them stating that the revenue or, indeed, the advantages that followed would be insufficient, a further 11.8% would prefer to postpone new investments to the near future, 5.9% affirm that there is not enough growth potential to support this type of investment, 5.9% are not interested in increasing the production, developing new processes or expanding into new markets at this time.
LACK OF ACCESS TO FINANCING
For 76% of the innovative firms the inability to have access to loans has not been a principal cause of blocking the wish to invest in growth, against only 24% who declared that it has. For 56% of the traditional firms the problem of not having access to loans has not proven to impede the wish to invest in their growth, on the other hand 44% declared that it has.
RELATIONSHIPS BETWEEN BUSINESSES AND THE BANKING SECTOR
50% of the innovative firms declare that they have received all the capital they have requested from the banking system. 25% of them did not approach the banking system at all. 15.9% received only partial funding. 9.1% were refused the financing they requested. 62’5% of the traditional firms declare that they have received all the capital they have requested from the banking system. 15.6% of them did not approach the banking system at all. 15.6% received only partial funding. 6.3% of the requests for financing received a negative response from the banking system.
REASONS FOR THE LACK OF ACCESS TO FINANCING FROM BANKS
It has to be pointed out that this part of the questionnaire received a low percentage of responses, and it would prove interesting to discover the reasons behind this. In fact, both samples gave the answer “other reasons” a high percentage (67.9% of innovative firms and 25% of traditional ones). Perhaps we should find out why so few answered this question and what the “other reasons” are. 25% of traditional firms indicated to have been refused financing from the bank due to the”insufficient collateral”. None of the innovative firms highlighted this option. A further 25% of traditional firms stated that they had received a negative feed-back because the bank held that the financing requested was too high. This percentage reduced drastically to 7.1% of the innovative firms. 12.5% of the traditional firms believe that the denial was due to the restrictive measures taken by the Basilea 2 against 10.7% of innovative firms.
RESISTANCE TO DEVELOPMENT OF PRIVATE EQUITY PROVIDERS
44% of traditional firms and 19.4% of innovative firms declare that they have no knowledge of this type of financing. 16% of traditional firms and 25.8% of innovative ones declare that they have no interest in understanding this type of financing. It is interesting to note how some of the more advanced types of financing instruments are still unknown by many businessmen, perhaps this can be blamed on the insufficient information supplied by the banks.
THE PREFERENCE IN FINDING INFORMAL AND/OR INDIVIDUAL INVESTORS
In answer to this question a clear distinction between the innovative and traditional firms was registered. 11.1% of traditional firms declare that this is the only form of financing available to them. None of the innovative firms think in the same way. 66.7% of traditional firms declare that they want to keep external investors for financing their company to an absolute minimum. None of the innovative firms think in the same way. Difficulties encountered in accessing traditional forms of financing were registered as 22.2% in traditional firms against 10% in innovative firms. 20% of innovative firms opt for the involvement of family or friends, none of the traditional ones chose this option. Some kind of investigation is needed into the reasons behind the response of 70% of innovative firms in choosing none of the options indicated on the questionnaire.
CONCLUSION
It is vital for the economy to have as an integral part innovative firms. The Marche Region is characterized by its highly industrialized make up, composed mainly of small to medium sized firms. This research focused on the financial models adopted by the innovative firms found in this Italian region. Although the positive role of credit in the start-up, consolidation and growth phases is well recognized, this research has revealed a need for an improvement in the quality of information given regarding this subject. It is clearly evident that the innovative firms have more difficulty in accessing investment funds and at a higher cost in comparison to the traditional companies. They resort more to financial debt than to equity finance. The exact opposite is true for traditional companies. Short term debt is amongst the most common forms of financial debt. For the innovative firms financial capital is mainly made up of their own capital (79.5% of cases). Venture capital covers 20.4% of cases. Only 20% of the SMEs innovative firms have postponed or cancelled their growth program because access to credit has been denied. The regulations introduced by Basilea 2 stopped SMEs innovative firms from getting access to credit in only 10.7% of cases (against 12.5% in traditional firms). Innovative firms would prefer to rely on PEP – Private Equity Providers – but after saying that, 19.4% of them have no knowledge of this form of financing, this percentage rises to 44% in the traditional firms. Innovative firms look for informal investors and individuals to avoid bureaucracy involved in getting access to credit. Of these 10% fall back on the more traditional types of credit supply, 20% involve family and friends in the company. Promoting and supporting companies which operate in the high technology sectors should be done by national and local government forming an important industrial policy. The high growth potential that these represent is, in fact, a benefit not only for the territory but for this Country’s entire economic system.
