We study how important internal capital has been in explaining the growth and survival of Swedish limited liability firms during 1997–2010.
It is often assumed that entrepreneurs lack external capital because of asymmetric information, and that policymakers therefore should take a more active role in stimulating innovations and creating firm growth.
However, classical theories imply that firm growth rather is explained by the reconfiguration of internal resources. In addition, business owners might choose not to grow with external capital even if they have growth ambitions because they want to retain the control of their company. Political decisions that increase the availability of internal capital might thus be more important than decisions that increase access to external capital.
We study how important internal capital has been in explaining the growth and survival of Swedish limited liability firms during 1997–2010. Our results indicate that:
The latter result suggests that internal capital is of importance to achieve a long-run sustainable growth. However, the regression results indicate that firms’ initial access or growth of internal capital cannot explain their revenue growth or ability to survive in the market.
There are a number of possible explanations for our results. First, access to internal capital might simply not be of importance for firm growth and survival. One explanation is that entrepreneurs, in equilibrium, might value an expansion with internal or external capital in a similar manner. This implies that it is the total amount of venture capital that affects revenue growth and firm survival, and not whether capital is generated internally or externally.
Another interpretation is that entrepreneurs still prefer to grow with internal capital, and that an increase of internal capital in relation to the availability of external financing still might lead to more firms want to expand their business. Our study does not investigate this issue.
Many entrepreneurs with a relatively high amount of internal capital might also not want to grow under the prevailing institutional conditions. In other words, the omission of variables, such as different growth barriers (e.g., high regulatory burden, strict employment protection legislation, matching problems, etc.) may explain why initial access or growth of internal capital does not have any observed impact on revenue growth and firm survival in our study.
Finally, a possible explanation may be that the growth and survival of firms to a very high extent is random. This means that it is difficult to explain what it is that affects the development of firms, which also implies that selective government support programs targeted towards growing companies are doomed to fail.
Serial number: PM 2017:01
Reference number: 2013/014