Public Provision of Sales Contingent Contracts as a Policy Response to Financial Constraints to Innovation in European SMEs (download PDF 208 Kb)

Alessandra Canepa, Kim Kaivanto and Paul Stoneman

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.

JEL number: O38 (Technological Change - Government Policy)