Do Credit Constraints Affect SME Investment and Employment ?

This paper explores the potential presence of credit constraints confronting Irish SMEs and investigates the impact of these constraints on firms’ employment and investment. Using new survey data collected by the Department of Finance, we define firms as credit rationed or discouraged borrowers and link these constraints to employment and the propensity to invest. We find a negative and significant effect of SME credit constraints on employment for firms that are discouraged from applying for credit. We also find a negative effect of constraints on the probability of an SME investing. This effect is driven by firms who are credit rationed when seeking capacity expansion loans. 1 Acknowledgements: The authors wish to thank the Banking Policy Division in the Department of Finance for facilitating access to the data and for adding additional questions to the survey waves. Particular thanks go to John Hogan, Angela Black, Brian Fee, Paul Mooney, and Damian Thomas for their time, inputs, suggestions and discussions. We also would like to thank Nick Ashmore, Alan Barrett, Peter Breuer, Catherine Collins, Clare Dunne, John FitzGerald, Padraig Hennessy, Emma-Jane Joyce, Martina Lawless, Fergal McCann, John O’Sullivan, Frances Ruane, and John Trethowan and the participants at the Economic and Social Research Institute conference on “SME Financing: Recent Trends and Policy Options” held on 19th April, 2013. The authors would also like to thank The Economic and Social Review associate editor Kieran McQuinn and two anonymous referees for comments which improved the paper considerably. This paper was written while the authors worked at the ESRI and does not represent the views of the Swiss National Bank or Indecon Consultants. * Corresponding author: [email protected]