Financing constraints and SME innovation during economic crises

Purpose The purpose of this paper is to provide a better understanding of the determinants of small and medium-sized enterprises (SME) financing constraints and their impacts on investments in innovation. To explicate these factors, the authors use a general definition of innovation, distinguishing between product and process innovations, and highlight the role played by banking relationships. Design/methodology/approach On the basis of a literature review covering works specializing in innovation, financing constraints, and SME characteristics, a quantitative study is carried out in Spain, using a sample composed by 267 Spanish SMEs. Information was gathered by applying surveys addressed to the firm managers. Findings The findings reveal that financing constraints hinder innovation among Spanish SMEs functioning in hostile environments, though long-term banking relationships can moderate these financing constraints. The longer the duration of a firm’s banking relationship, the fewer financing constraints it faces, because the relationship significantly reduces information asymmetry. Practical implications To reduce financing constraints on their innovation, SMEs should establish long relationships and low debt concentration with their main bank. The more banks a firm works with, the greater its financing constraints. The findings have managerial implications, not just for firms but also for government policymakers and providers of consulting services. Originality/value This paper provides an in-depth analysis of the factors that affect innovation, along with insights into which financing constraints limit innovation during a severe recession.