The role and transparency of subsidies in SME financing: the Dutch situation described

Bakker, Nick (2012) The role and transparency of subsidies in SME financing: the Dutch situation described.

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Abstract:The research presented in this thesis examines the role and transparency of subsidies in SME financing in the Netherlands. This is done through examining three key topics: SME financing, subsidies and accountability by reviewing literature and conducting interviews with professionals in the work field. After a short introduction the second chapter presents the research framework, followed by the literature review. The topics discussed during the interviews are based on the literature review. The fourth chapter describes the situation in the Netherlands. In Chapter V the interview structure and sample of respondents will be addressed. The sixth chapter presents the research outcomes, these outcomes will subsequently be discussed in Chapter VII. Followed by the conclusions and recommendations of the research performed at the end of the thesis. SME financing has caught the attention of scholars, economists and policy makers because SME firms are important for economic development. As a result of the ongoing consequences of the 2007 credit crunch it is difficult for SME firms to obtain external financing. It is vital for firms to overcome information asymmetries when attempting to obtain external financing. The leading information based theory on SME financing is the pecking order theory, which will be applied during the research. Firms can use subsidies as a source of external financing. Subsidies are granted by governments to correct for market imperfections or to stimulate politically desired developments. The most relevant subsidy types related to SME financing are: cash, credit and tax subsidies. As most subsidies are aimed at stimulating certain activities firms are often required to account for the specific content in addition to the financial accountability that has to be provided towards government. Accountability is about the justification towards internal and/or external stakeholders by sharing information with them and thereby reducing information asymmetries. When firms are transparent they voluntarily provide full and understandable information towards stakeholders to gain their confidence. In order to compare information more easily and to increase the consistency of information, financial accounting information is becoming more harmonized. Regarding the role of subsidies in Dutch SME financing it can be stated that in general this role is rather limited. Relatively few firms receive subsidies and they stand low in the pecking order of financing sources due to the connected terms and conditions. Firms that do receive subsidies can experience financing benefits from them, to what extent differs per type of subsidy and the specific circumstances. The influence of cash and tax subsidies on the overall financing of a firm is limited whereas credit subsidies have a relative large impact. However, this type of subsidy is least preferred by entrepreneurs and is placed at the bottom of the subsidy pecking order: cash, tax and credit subsidies. Although the role of subsidies in Dutch SME financing is rather limited, subsidies seem to fit well into widely used theories on SME financing like the pecking order and life cycle theory. The accountability for subsidies is quite strict compared to other sources of finance, mainly because of the amount of accountability required: financial and content specific. Subsidies are typically not explicitly displayed in the annual accounts of SME firms. Through deducting subsidies from the corresponding expenses or balance sheet items the annual accounts still present a true and fair view. However, because subsidies are not explicitly mentioned the role of subsidies in SME financing is not very transparent. As subsidies fit well into theories on SME financing it is recommended to perform further research on the role of subsidies in SME financing. To get more tangible outcomes it is advised to examine the influence of one subsidy in more detail instead of examining the whole range of subsidies. To perform a quantitative study would also be a valuable addition to the qualitative research presented in this thesis. In order to enhance the transparency of subsidies in SME accounting financing it is suggested to incorporate subsidies in the upcoming SBR framework in an explicit manner. This could increase the awareness among entrepreneurs and thereby the use of subsidies. This use could also be stimulated if government focuses on offering fewer and longer existing subsidies.
Item Type:Essay (Master)
Clients:
Finan
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Business Administration MSc (60644)
Link to this item:http://purl.utwente.nl/essays/61645
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