Financing constraints and SME growth: the suppression effect of cost-saving management innovations

A constrained access to external financing has a negative effect on firm growth. This is even more problematic for SMEs, as smaller firms are more prone to having financing constraints. Drawing on the resource dependence theory, we argue that firms with constrained access to external financing seek to become less dependent on their access to external financing. Firms can introduce cost-saving management innovations, which are innovations in the form of new organizational processes, practices and structures with the goal of reducing the firm’s costs and increasing its efficiency. Relying on survey data of 2,973 observations of SMEs among 34 European countries, our results show that SMEs with constrained access to external financing are indeed more likely to introduce such cost-saving management innovations. We also find evidence that cost-saving management innovations positively affect firm growth. Hence, we find a positive indirect effect of constrained access to external financing on SME revenue growth through cost-saving management innovations. This positive indirect effect suppresses the negative direct effect of constrained access to financing on revenue growth, pointing to a potentially important role of cost-saving management innovations as a coping strategy for constrained access to external financing for SMEs.