Is the growth of euro area small and medium-sized enterprises constrained by financing barriers?

In this paper the financing conditions of euro area firms are investigated relying on a comprehensive sample of more than one million firm-years in the period from 1993 to 2004. The relationship between financing conditions and firms' growth across firm sizes is analysed on the basis of newly created indicators for the euro area, which reflect the industry-specific financing needs and growth opportunities. We find evidence for generally worse financing conditions of micro and small firms, after having controlled for a series of firms and country characteristics. The correlation between time-varying industrial growth opportunities and realised firms' growth increases by size, which suggests that, in the short run, larger firms can adapt faster to the opportunities, given that they are not restricted by the availability of financial resources. In the long run, the time-invariant technological need of external finance plays a larger role in explaining the relative importance of firm size across industries. We find that small firms generally do not specialise in industries with high inherent reliance on external financing, from which we can also conclude that they tend to be more financially constrained than large firms.