The Financing of High-Tech SMEs: Investigating the Effects of Capital Structure on Performance

Abstract

The thesis examines the capital structure of small and medium-sized enterprises which are based in the high-technology sector. Little analysis so far has investigated the impact of financing on this important sector and the influence different financing options have on the firms' performance. The importance to job growth and the economy are critical as within the EU, SMEs encompass 99 percent of the total businesses and 67 percent of total employment, while high-technology sectors have been vital to economic strength and demonstrated considerable growth in the past decade (Eurostat 2012; Eurostat 2013). The analysis is discussed in three separate studies, comprising of two different datasets. The first study implements secondary financial data of European high-tech SMEs during a 10-year period from the Orbis database. Two studies use primary data from a questionnaire that was undertaken and contains a sample of 100 high-tech SMEs based in Ireland. The country is very suitable for such in-depth survey analysis as it possesses the highest percentage of innovative businesses at 36 percent between the years 2012 and 2014 and measures strongly against European SME and innovation markers (Eurostat 2017d). This data is novel and provides a foundation for research in areas not previously analysed. Four key research questions are answered throughout the thesis, examining critical areas of capital structure for high-tech SMEs.

The first investigation is undertaken using panel data that encompasses over 7,300 high-tech SMEs based in Europe over a 10-year period. The study is broken into three separate sections, through regression analysis. The first section analyses the influence of capital structure on the financial performance. Support for a modified high-tech pecking order theory is found for firms that want to improve their financial performance, with debt having a negative impact on the financial performance measures, while equity has a positive effect. The second section examines the determinants of capital structure. The third section investigates the impact of capital structure on internationalisation, patents are found to have a positive impact on exports.

The second study implements the questionnaire data, which first provides insights into the determinants of capital structure for high-tech SMEs The results find that key determinants such as the size of the firm, the number of employees, the proportion of intangible assets and the R&D expenditure can all affect the capital structure. The influence of capital structure and firm characteristics on the generation of EBITDA and profitability is also examined. Previous experience in an incubator or accelerator programme has a negative relationship with the financial performance and profitability of these firms.

The third study first examines how the challenges and objectives of high-tech SMEs are influenced by their capital structure choices. This topic is limited and no previous analysis exists, thus the creation of novel results and analysis is added to the literature. The use of debt finance increases the risk of being unable to obtain adequate future capital. Results demonstrate that high-tech SMEs rely heavily on internal finance, but internal finance can raise the challenge of meeting future expenses. The findings produced within this investigation are novel. This investigation also examines internationalisation through an analysis of exporting and the impact of capital structure and key characteristics on their outcome. The use of equity finance has a substantial negative relationship with exports and an extremely large positive influence on domestic sales. When information asymmetry is limited, exports revenue will significantly increase. The study produces original findings on a new important topic.

Various capital structure theories are implemented into the analysis and discussions of the results. The findings demonstrate high-tech SMEs should acknowledge their financing options as they can affect the businesses' performance through a multitude of different means