Innovation and the credit crunch - part 2

Innovation graph 2: Comparison of present recession with 1988-1994 - GDP growth and interest rateThe figure to the right examines GDP growth and interest rates for the same periods. Interest rates were much higher in the earlier period than were found leading up to the credit crunch. In both periods rates fell during the recession, but to unprecedentedly low levels in 2009. This interest rate that measures the cost of short-term borrowing by the government should not be confused with what SMEs have to pay when margins are added.

The picture for growth is also different since the recent recession was more abrupt in its impact. Economic output fell more dramatically in 2009 than occurred in 1991, but has also recovered more sharply. However, there is some evidence that it has stalled recently.

So how have SMEs faced this recession compared with in the early nineties? We can say that they were more concerned this time about demand constraints than about the cost and availability of finance; and this is consistent with the larger fall in GDP and the lower level of interest rates. In 2008 only 16 per cent were seeking finance compared with 22 per cent at the same stage of the 1991 recession. Growth ambitions were also lower despite the quicker initial recovery this time round. We hope to return to this panel of firms in the coming months to discover how their performance and prospects have changed since 2008.

The reaction of finance providers to the credit crunch was to retreat from risk, or to price risk more highly in their offerings. The UK~IRC report shows that this was potentially damaging to the type of firm of great importance to the economy overall – the innovative SME. The report finds that they not only found it harder to raise overdrafts and commercial loans, but were also more likely to have faced a rise in the cost of finance relative to non-innovative firms. The impact of these changes on their innovative performance has yet to be assessed, but the findings give some cause for concern.

One cause for optimism is that there is some evidence that SMEs may be more resilient than in the past. The Centre for Business Research has been tracking UK SMEs over the past 20 years. They find that the proportion of start-ups that are de novo (and potentially less experienced) has fallen from 68 per cent in 1991 to 51 per cent in 2004. Business planning and the use of other management tools amongst SMEs has also increased. This may also account for some of the observed rise in business survival rates prior to the current recession. Whether improved skills and experience are sufficient to leave a thriving SME sector when the economy recovers is not yet known.

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