Debt vs. self-financing innovation projects: An exploratory study of Spanish agri-food SMEs

Aim of study: This paper determines the preferences for debt or equity ‒ common stock and self-financing ‒ that are shown by agri-food companies to finance innovation investment strategies and identify the monitoring role that third-party funding providers can play.Area of study: A sample of 41,109 Spanish SMEs (364,020 observations).Material and methods: The information was obtained from the SABI database, using the Generalised Method of Moments (GMM) estimator and a logistic regression like contrast methodologies.Main results: Spanish agri-food companies undertake innovation projects by financing these investments through owners’ resources, mainly from current common stock, as they are independent of these companies’ capacity to generate internal funds. This may be conditioned by the problems of severe negative self-financing presented by this sector in Spain which make it difficult to use retained earnings as a source of financing for new investments; 30% of these firms have a negative self-financing level of EUR 100,000 as the losses accumulated by economic activity are higher than the reserves provided.Research highlights: Agri-food companies prefer to use owners’ funds to finance innovation projects which allows them to maintain the concentration of power, a decision that is reinforced by the limitation to credit access due to innovation creates intangible assets that are not usually accepted as collateral by financial institutions. Meanwhile, given the particularities of these companies ‒ instability and liquidity problems due to the need for funds of operations ‒ the recourse to debt is an appropriate control mechanism to prevent overinvestment decisions.