The impact of government financial assistance on the performance and financing of Australian SMEs

This paper aims to examine the impact of government financial assistance provided to Australian small and medium-sized enterprises (SMEs).

This study uses firm-level panel data on more than 2,000 SMEs over a five-year period from the Business Longitudinal Database compiled by the Australian Bureau of Statistics. The authors measure the impact of government financial assistance in terms of subsequent SME performance (income from sales of goods and services and profitability) and changes in the availability of alternative nongovernment finance.

The authors find government financial assistance helps SMEs improve performance over and above the effects of conventional financing. They also find than the implicit guarantee effect signalled by a firm receiving government financial assistance suggests firms are more likely to obtain nongovernment finance in the future. Control factors that significantly affect SME performance and finance availability include business size, the level of innovation, business objectives and industry.

Nearly all of the responses in the original survey data are qualitative, so we are unable to assess how the strength of these relationships varies by the levels of assistance, income and profitability. The measure of government financial assistance of the authors is also general in that it includes grants, subsidies and rebates from any Australian Government organisation, so we are unable to comment on the impact of individual federal, state or local government programmes.

Government financial assistance helps SMEs improve both immediate and future performance as measured by income and profitability. This could be because government financial assistance quickly overcomes the financial constraints endemic in SMEs. Government financial assistance also helps SMEs obtain nongovernment finance in the future. The authors conjecture that this is because it overcomes some of the information opaqueness of SMEs.

Few studies focus on the impact of direct government financial assistance compared with indirect assistance as typical in credit guarantee schemes. The authors use a very large and detailed data set on Australian SMEs to undertake the analysis.