Understanding how constraints on access to finance and under-investment impact on productivity growth in smaller firms

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The UK has suffered from problems of under-investment and low productivity growth for a long time. This lack of investment and growth constraints how much money people are paid, how much money can be raised in taxes to pay for public services and the overall wealth of the UK population. The UK has experienced a large increase in the number of small firms in the economy over the last fifty years. As a result, around 60% of the working population rely on the small business sector for their jobs, incomes and well-being. A big concern, that has been around since the 1930s is that small firms may struggle to access loans from banks and investment from investors. For many reasons, there is a significant gap in our current knowledge about the contribution of smaller firms to the overall performance of the UK economy and specifically how their ability to access finance influences how they contribute to productivity. To fully understand how the 6 million small firms in the UK contribute to economic growth, this project helps researchers to understand more about small firms that are owned and managed by entrepreneurs. It explores how these entrepreneurs have personal preferences and talents that shape how their firms operate and explore potential opportunities for new investment that might lead to productivity-enhancing growth. When small firms have opportunities to invest, it then faces choices about how to fund these new investments. Many small firms have a strong dislike for external finance and choose to limit their investments to ones they can fund from their own resources. Others seek external debt, often bank loans, but are refused. Others get bank loans, but only get a fraction of the amount they requested. All of these scenarios potentially lead to an under-investment in productivity enhancing growth.This research project traces out the whole process from the small, entrepreneurial firm, to their investment opportunities and funding choices, and then examine how, when and where this process can lead to productivity growth. The project explore the chain of events in great detail and cover the full range of investment opportunities and potential sources of finance. This includes looking at bank debt, government guaranteed loans, "Peer-2-Peer" lending, Alternative Lenders, FinTech, right through to more sophisticated equity finance. This broad overview allows the project to establish, at each step in the causal chain of events, what types of firm face the greatest barriers to progression onto the next stage which ultimately end up with new investment and productivity growth. Specific points of focus within this chain of events will be on the identification of differences by (a) regions and place, (b) firms of different sizes, (c) firm of different ages, (d) differences by industry, and (e) patterns of innovation. The project builds a nuanced picture of the problems that small firms face accessing investment capital and increasing their productivity that will give policy-makers and businesses themselves the evidence to support a mutually beneficial and co-ordinated response to address these problems that may ultimately benefit the 6 million UK small business owners and their 16.8 million employees and their families.