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Financing Innovative Small and Medium-Sized Enterprises in Canada

VI. Summary andf Conclusions

Innovation has been recognised as an essential component of the economic growth process. There is much research on the various underlying aspects of innovation, but there is little on its financing, even though it is recognised as a key determinant. It is generally accepted that it is more difficult for innovative SMEs to access financing, but such claims are usually not substantiated. Using data from the SME Financing Data Initiative Survey on Financing of Small and Medium Enterprises, 2004, this paper has profiled innovative SMEs along a range of characteristics and examined whether they differ from non-innovative SMEs in terms of access to financing and financing terms and conditions.

The findings of this study have shown that innovative SMEs, which account for 4.2 percent of SMEs in Canada, have different financing activities and experiences than non-innovative SMEs. Innovative SMEs had greater financing needs than non-innovative SMEs, but were less successful in obtaining the financing requested. This paper shows that financing terms and conditions for innovative SMEs are consistent with their perceived higher risk by financial institutions.

Innovative SMEs were about four times more likely to request equity financing than non-innovative SMEs. Equity financing is important to innovative SMEs as it represented 44.3 percent of the total financing received compared with only 8.7 percent for non-innovative SMEs. Moreover, innovative SMEs were three times more likely to request equity financing from a venture capital firm than non-innovative SMEs. It was also shown that innovative SMEs were about six times more likely to use the debt financing requested for research and development.

Canadian innovative SMEs face more constraining financing terms and conditions than non-innovative SMEs. For example, innovative SMEs paid higher interest rates and got shorter loan terms. This is consistent with the fact that financial institutions consider innovative SMEs more risky than non-innovative SMEs as innovation often involves the continuous development of new products and use of new processes in untested markets.

A couple of important limitations are noted. Since the sample size of innovative SMEs is small, several estimates have a higher coefficient of variation and margin of error. These estimates may not be very reliable, and therefore should be used with caution.

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