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The Public Provision of Sales Contingent Contracts as a Policy Response to Financial Constraints to Innovation in European SMEs

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Author Info

  • Stoneman, Paul

    ()
    (University of Warwick)

  • Canepa, Alessandra

    ()
    (University of York)

  • Kaivanto, Kim

    ()
    (Lancaster University Management School)

Abstract

It is argued that in Europe (and elsewhere) governments intervene actively to stimulate the SME sector, and because SMEs face financial constraints in particular, governments encourage the provision of debt and venture capital to such firms. We discuss a particular form of finance - funding secured only on a claim written on sales, i.e. Sales Contingent Claim (SCC) backed finance - that offers a different risk-repayment profile to debt and equity instruments which will be attractive to many firms. We argue that if such financing were available it would further stimulate SME growth and innovation. However, for various reasons SCC-backed financial instruments are not available to SMEs on the market. We recommend the correction of this market incompleteness by the introduction of a scheme providing SCC-backed corporate finance for SMEs in higher risk (higher tech) sectors. This is not a recommendation of a subsidy for SMEs. We illustrate the workability of such schemes by looking at existing examples (aimed at project finance for larger firms) and also discuss other practical issues

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Bibliographic Info

Paper provided by United Nations University, Institute for New Technologies in its series EIFC - Technology and Finance Working Papers with number 38.

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Date of creation: 2004
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Handle: RePEc:dgr:unutaf:eifc04-38

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Web page: http://www.intech.unu.edu

Related research

Keywords: Small and Medium Enterprises; Finance; Technological Change; Government Policy;

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  1. Hall, Bronwyn, 2002. "The Financing of Research and Development," Department of Economics, Working Paper Series qt5rf0x9gz, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. Stoneman, Paul & Canepa, Alessandra, 2003. "Financing Constraints in the Inter Firm Diffusion of New Process Technologies," EIFC - Technology and Finance Working Papers 28, United Nations University, Institute for New Technologies.
  3. Sujoy Mukerji & Jean-Marc Tallon, 2000. "Ambiguity Aversion and Incompleteness of Financial Markets," Economics Series Working Papers 46, University of Oxford, Department of Economics.
  4. Jean-Pierre Danthine & Francesco Giavazzi & Ernst-Ludwig von Thadden, 2000. "European Financial Markets After EMU: A First Assessment," NBER Working Papers 8044, National Bureau of Economic Research, Inc.
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  13. Gernot Klepper, 1994. "Industrial Policy in the Transport Aircraft Industry," NBER Chapters, in: Empirical Studies of Strategic Trade Policy, pages 101-130 National Bureau of Economic Research, Inc.
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  16. Robert E. Carpenter & Bruce C. Petersen, 2002. "Is The Growth Of Small Firms Constrained By Internal Finance?," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 298-309, May.
  17. Stoneman, Paul, 2001. "Heterogeneity and Change in European Financial Environments," EIFC - Technology and Finance Working Papers 7, United Nations University, Institute for New Technologies.
  18. Kaivanto, Kim & Stoneman, Paul, 2004. "Risk Shifting, Technology Policy and Sales Contingent Claims: When is Launch Aid to the Aerospace Industry A Subsidy?," CEPR Discussion Papers 4798, C.E.P.R. Discussion Papers.
  19. Richard Baldwin & Paul Krugman, 1988. "Industrial Policy and International Competition in Wide-Bodied Jet Aircraft," NBER Chapters, in: Trade Policy Issues and Empirical Analysis, pages 45-78 National Bureau of Economic Research, Inc.
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