Bridging the Equity Gap for Innovative SMES

The contribution of small and medium-sized enterprises (SMEs) to job creation, innovation and economic growth is acknowledged and testified in developed countries, as well as in developing and emerging economies. Although it represents an extremely small proportion of the total number of SMEs in any given country, the subsector of innovative SMEs (ISMEs) has an even greater role in creating new jobs and enhancing technological development, with a major contribution to overall economic growth. This is particularly true for advanced economies, where growth in productivity is generated not so much by the accumulation of capital as by innovation and its diffusion by the knowledge spillover mechanism and entrepreneurial capital.In view of the strategic economic role played by the creation and development of these firms, an understanding is required of the factors which may adversely affect the growth of SMEs, and especially the financial difficulties which may prevent them from fulfilling their potential. Since SMEs, and ISMEs in particular, may face serious constraints due to market failures, these firms may be the victims of financing and equity gaps even in advanced economies. Given this scenario, the book deals with the theme of the equity gap for innovative SMEs and the devices and instruments developed in order to bridge it. The main research questions might be summarised as follows:1. Is it possible to separate out and verify the financing constraints that affect the birth and development of ISMEs?2. Is it possible to identify and perhaps measure the size of the financing gap in a reliable manner?3. Is there a role for financial intermediaries and markets in bridging the equity gap? And if so, what is it?4. Is public intervention feasible in solving this problem? If so which are the best practices developed at the international level by policy-makers?The main results can be summarized as follows:1. There are certainly financing constraints that affect the birth and development of ISMEs in particular, arising from market failures due especially to an information asymmetry. Moreover, given the specific characteristics of firms of this kind, risk capital emerges as the most suitable form of financing, in a reversal of the traditional hierarchic financing structure. 2. An equity gap for young and innovative SMEs does exist. The measurement techniques developed up to now have not been completely satisfactory due to their concentration on qualitative methods; in spite of this, they are useful for an initial prima rough quantification of the phenomenon. However an improvement in quantitative estimation is required, and the original model presented here is intended as a step in this direction. 3. The intermediaries which may contribute the most to overcoming the financial constraints facing ISMEs are venture capitalists and business angels; they also make a significant contribution to the growth of venture-backed firms. As far as financial markets are concerned, exchanges do not appear suitable for financing the initial growth stages, but they are able to help remove financial constraints by providing investors with the guarantee of effective exit strategies. To this end the identification or creation of specific markets/segments on which these firms can be listed seems to be the right path.4. The existence of market failures in providing ISMEs with adequate financial resources justifies the growing role of the public sector in providing equity financing. However, as the best practice developed at the international level shows, an effective public intervention policy must take all the instruments in the financial ladder into consideration and also include non-financial measures aimed at stimulating entrepreneurship. Moreover, a cost-benefits analysis assessing the fit between the objectives and results of public assistance schemes is necessary as a basis for the drafting of future policies.