Research for Practice – Financing the growth of SMEs

By Federica Salvade, PhD, Associate Professor, PSB Paris School of Business

One objective of the Capital Markets Union (CMU) is to deepen financial integration and increase competition: “More cross-border risk-sharing, deeper and more liquid markets and diversified sources of funding will deepen financial integration, lower costs and increase European competitiveness.”^[1] Aligned with this, CMU also seeks to mobilize capital in Europe and channel it to all companies, including Small and Medium Enterprises (SMEs).

Why a focus on SMEs is crucial?

As of 2014, SMEs in the European Union accounted for 99.8% of all enterprises in the non-financial business sector, employing almost 90 million people - 67% of total employment – and generating 58% of the sector’s value added.^[2] 

What could help the growth of SMEs?

Access to capital market financing for SMEs within Europe remains limited, with a heavy reliance on bank lending.^[3] Since “…in most OECD countries more debt is typically associated with slower growth while more stock market financing generates a positive growth effect”[4],  the use of equity as source of capital should be seriously considered.

How academic research could contribute?

Yet few studies focus on the determinants and dynamics of the SMEs cost of equity. However, knowledge of these parameters by SMEs could make them more “investment ready”. Furthermore, research in this field could help regulators in implementing policies oriented towards a better allocation of capital.