Access to finance: Small and Medium Enterprises effect on Economic Growth

Abstract: The aim of this paper is to examine the effect small and medium enterprises’ (SMEs) access to finance has on economic growth. The relationship will be explored using data from the European Commission’s SMAF index covering the 28 EU member countries. By using the System Generalized Method of Moments (GMM) estimator, a significant and robust relationship between access to finance and economic growth is found. The results show that access to finance affects economic growth through Labour productivity and Total Factor productivity growth, but not through GDP per capita growth. Based on these results a discussion is put forward regarding the relationship between SME access to finance and productivity with respect to R&D investments. The SME support programs that the EU are funding are also discussed and weather they are implemented in a way that helps firms gain access to credit and contribute to economic growth.