Effects of financing on the investment of Dutch SMEs during the financial crisis

This study investigates the effect of the recent financial crisis on the investment of Dutch SMEs (small and medium sized enterprises). Precisely, the focus is on the availability of internal finance and external finance of Dutch SMEs and their effect on the investments during the recent financial crisis. It is hypothesized that, investments of SMEs declined significantly during the financial crisis due to the supply shock of external finance (bank credit) and less cash flows generated by SMEs because of sluggish economic condition. It is also hypothesized that, during the financial crisis internal finance (cash flows) would determine more investment than the external finance (bank credit). Because cash flows become a distinct source of investment than the external finance due to market imperfections. As Dutch SMEs are more dependent on banks for the external sources of finance, financial crisis would affect their business activity negatively. To investigate the effect of financial crisis, finance and investment related data of Dutch SMEs are collected over the period of 2004-2012. SMEs are classified by the European commission definition. Firms are included which are active during the sample period. Financial institutions, nonprofit and government firms are excluded due to the nature of the study. The final sample consists of 2,890 investment observations. In this study unbalanced panel data have been used. OLS regression model has been implied to investigate the effect of financing (i.e. cash flows and bank credit) on the investment during the financial crisis. In all of the regressions, industry dummy has been used to control the individual industry effects. Besides, size, age, growth opportunity are used as control variables. The results suggest that the financial crisis has induced a negative credit supply shock which adversely affected the investment of private SMEs in the Netherlands. The results further highlight that, the financial crisis has weakened the supply of short term bank finance and long term bank finance to Dutch SMEs. Overall, the results suggest that investment of private Dutch SMEs are vulnerable to variations in the supply of bank credit which may have long-term implications for the survival and growth of these firms, which in turn might have a negative effect in the economy. The findings show that, bank credit determined more investment during the financial crisis than any other financing source. The results signify that a financial crisis may restrict the SMEs ability to finance investment, which would in turn affect the growth while this may not be a matter of concern in normal state of the economy