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Financing Innovative Small and Medium-Sized Enterprises in Canada

I. Introduction

Innovation is crucial for maintaining firm competitiveness and increasing standards of living. Financing innovation can be difficult as innovative activities and assets are usually intangible, thereby making assessment of their monetary values difficult. In addition, innovative firms are usually considered more risky as their chances of success are more difficult to assess. This paper describes financing activities of innovative small and medium-sized enterprises (SMEs) in Canada and provides a comparison with non-innovative SMEs. In this analysis, research and development (R&D) intensity is used as a measure of innovation. SMEs that spend more than 20 percent of their total investment expenditures on R&D are defined as innovative firms; those that spend 20 percent or less of their total investment expenditures on R&D are defined as non-innovative SMEs.

There exists a substantial body of research that addresses the topic of innovation; however, there is little research on financing innovative SMEs. Thus, studying financing of innovative SMEs will provide valuable information on experiences, instruments used and financing conditions.

The paper uses the comprehensive database of the SME Financing Data Initiative Survey on Financing of Small and Medium Enterprises. This survey was launched in 2000 by Statistics Canada in partnership with Industry Canada and Finance Canada and is conducted every three years. It measures the demand for and sources of financing of Canadian SMEs, including data on the application process, firm profiles and demographic characteristics of SMEs ownership. The results presented in this paper are based on the data of the Financing of Small and Medium Enterprises, 2004, which include 13 042 observations.

This paper tries to address the following research questions:

1. Are the financing activities and experiences of innovative SMEs in accessing financing different from those of non-innovative SMEs?
2. Do innovative SMEs face different financing terms and conditions than non-innovative SMEs seeking financing?

To answer these questions, this paper is organised as follows. Section II summarizes the related literature on the capital structure and financing experience of innovative firms. Section III discusses the data and methodology employed. Section IV describes the empirical results. Section V presents the multivariate analysis. Section VI summarizes and concludes the paper.

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