Economic Research Forum (ERF)

Financial constraints on small firms’ growth: pandemic lessons from Iran

928
How does access to finance affect the growth of small businesses? This column presents new evidence from Iran before and during the Covid-19 pandemic – and lessons learned by micro, small and medium-sized enterprises.

In a nutshell

Micro, small and medium-sized enterprises in Iran that received financial support and remained unaffected by the pandemic demonstrated greater growth; for MSMEs that were affected by the pandemic and which did not receive external financing, the reduction in growth was more pronounced.

Enhancing access to financing for the growth and sustainability of MSMEs is crucial, particularly during times of crisis like Covid-19; the challenges faced by MSMEs in emerging economies are large, especially in the context of a sanctioned country grappling with a global pandemic.

To enhance the growth and sustainability of MSMEs, policy-makers should improve access to finance by offering government-backed loans, subsidies and alternative financing channels; foster a favourable business environment; and implement specific policies in times of crisis.

Numerous studies have illustrated that financial constraints have a significant impact on the survival, growth and performance of micro, small and medium-sized enterprises (MSMEs).

Due to limited resources and heavy reliance on bank loans with high interest rates, MSMEs become particularly vulnerable to disruptions during economic crises. Unlike large firms, MSMEs struggle to handle fluctuations in demand, especially when revenues decline and the need for bank credit increases. This places them at a disadvantage in terms of production growth and market share compared with larger firms, thereby reducing their chances of survival (Bottazzi et al, 2014; Bakhtiari et al, 2020; Cheratian et al, 2023; Cheratian et al, 2024).

The Covid-19 pandemic caused significant disruptions to the global financial ecosystem, affecting financial markets, business financing and the world economy. Consequently, the private sector has faced various challenges, including liquidity shortages, the risk of bankruptcy and income losses. Firms in urgent need of liquidity have encountered difficulties in obtaining credit, as banks have been hesitant to lend to those with low credit quality and asset values (Khan, 2022).

In Iran, Covid-19 has had a profound impact on an economy that was already grappling with oil dependency, international sanctions, negative growth and high inflation. During the first two months of the outbreak, Iranian firms experienced a 50% decline in sales growth. By June 2020, 34% of business owners reported a decrease in income exceeding 75%. Most business owners felt they did not have sufficient cash reserves to cope with the reduction in revenue.

The Iranian government was also facing financial difficulties due to declining revenues resulting from sanctions and falling oil prices, which limited the resources available for protectionist policies (Borimnejad and Dehyouri, 2022; SRTC, 2020).

Surveying small firms in Iran

In a recent study, we analysed the responses to 486 questionnaires sent to a sample of 500 Iranian MSMEs over a period before and during the pandemic. To ensure representation and diversity, random sampling was used to select five of the country’s provinces: Tehran, Khorasan Razavi, Kerman, Mazandaran and Ilam. These provinces were chosen due to their geographical dispersion and varying economic maturity.

The survey was conducted by the Academic Center for Education, Culture, and Research (ACECR) from December 2019 to September 2020. The respondents were owners or senior managers of the firms, and face-to-face interviews were conducted to collect data from the selected firms in each province.

The study focused on analysing the performance of sales and production growth as key indicators. In this context, a value of ‘1’ signified growth, while ‘0’ indicated no growth. Among the 486 respondents, 121 reported experiencing growth in sales, while 126 respondents reported growth in production.

The survey also explored the presence of financial constraints using binary variables. Specifically, the variable ‘Access to finance’ received a value of ‘1’ if loans were fully funded, while ‘non-access to finance’ obtained a value of ‘1’ if loans remained unfunded. Impressively, around 20.9% of the respondents reported having access to finance, while a substantial 68.5% faced non-access to finance.

The study also looked at the influence of Covid-19 as a moderating variable. Notably, a significant 37% of businesses were affected. In this aspect, a value of ‘1’ denoted the impact of the pandemic, while ‘0’ indicated no discernible effect.

Other factors considered in the study were firm age (with 53% of firms being over 11 years old), firm size (with 60% of firms having 10-50 employees), economic downturn (with 315 firms facing bankruptcy), technology acquisition (with 65% of firms having access to technology), owner education (with 65% of owners having university degrees), human capital (with 66% of firms hiring new employees and 52% adjusting their workforce) and labour training (with 57% of firms providing training courses).

Results and implications

Our analysis reveals a positive relationship between access to finance and the growth of MSMEs in terms of sales and production. The study demonstrates that limited access to external financing hampered growth significantly. Younger firms operating for one to five years exhibited greater growth compared with their older counterparts (those operating for six to ten years).

In addition, access to technology, owner education, and new employment had positive and significant effects on firms’ growth. On the other hand, facing bankruptcy and labour adjustment negatively affected sales and production growth for MSMEs.

Our study also sheds light on the crucial moderating role played by the pandemic in the finance-growth relationship for MSMEs in Iran. The results indicate that MSMEs that received financial support and remained unaffected by the pandemic demonstrated greater growth compared with those affected by this global crisis. But for MSMEs that were affected by the pandemic but did not receive external financing, the reduction in growth was more pronounced.

These findings emphasise the significance of enhancing access to financing for the growth and sustainability of MSMEs, particularly during times of crisis like Covid-19. This is important to bear in mind when discussing the challenges faced by MSMEs in emerging economies, specifically within the context of a sanctioned country grappling with a global pandemic.

To enhance the growth and sustainability of MSMEs, policy-makers should make three key policies their priorities:

  • First, they should improve access to finance by offering government-backed loans, subsidies and alternative financing channels.
  • Second, they should foster a favourable business environment by reducing bureaucratic hurdles and stringent requirements.
  • Third, it is crucial to implement crisis-specific policies, such as emergency funding and debt relief, to support MSMEs during challenging times, such as the pandemic.

Further reading

Bakhtiari, S, R Breunig, L Magnani and J Zhang (2020) ‘Financial constraints and small and medium enterprises: A review’, Economic Record 96(315): 506-23.

Borimnejad, V, and S Dehyouri (2022) ‘Content analysis of the economic problems of Covid-19 disease on businesses: A case study of Tehran province, Iran’, Annals of Data Science 9(5): 1069-83.

Bottazzi, G, A Secchi and F Tamagni (2014) ‘Financial constraints and firm dynamics’, Small Business Economics 42: 99-116.

Cheratian, I, S Goltabar and MR Farzanegan (2023) ‘Firms’ persistence under sanctions: Microlevel evidence from Iran’, The World Economy 46(8): 2408-31.

Cheratian, I, and S Goltabar (2023a) ‘Finance-growth nexus in time of COVID-19 lockdown: Case of Iranian MSMEs’, ERF Working Paper No. 1695.

Cheratian, I, and S Goltabar (2023b) ‘Beyond sanctions: Unpacking growth moderators for Iranian MSMEs’. Available at SSRN: https://ssrn.com/abstract=4674116   

Cheratian, I, S Goltabar, HF Gholipour and MR Farzanegan (2024) ‘Finance and sales growth at the firms level in Iran: Does type of spending matter?’, Research in International Business and Finance 67:102142.

Khan, SU (2022) ‘Financing constraints and firm-level responses to the COVID-19 pandemic: International evidence’, Research in International Business and Finance 59: 101545.

SRTC (2020) The impact of the corona virus on Iranian businesses, Statistical Research and Training Center, Tehran.

Most read

Green hydrogen production and exports: could MENA countries lead the way?

The Arab region stands at the threshold of a transformative opportunity to become a global leader in green hydrogen production and exports. But as this column explains, achieving this potential will require substantial investments, robust policy frameworks and a commitment to technological innovation.

Freedom: the missing piece in analysis of multidimensional wellbeing

Political philosophy has long emphasised the importance of freedom in shaping a meaningful life, yet it is consistently overlooked in assessments of human wellbeing across multiple dimensions. This column focuses on the freedom to express opinions, noting that it is shaped by both formal laws and informal social dynamics, fluctuating with the changing cultural context, particularly in the age of social media. Data on public opinion in Arab countries over the past decade are revealing about how this key freedom is perceived.

Climate change threats and how the Arab countries should respond

The Arab region is highly vulnerable to extreme events caused by climate change. This column outlines the threats and explores what can be done to ward off disaster, not least moving away from the extraction of fossil fuels and taking advantage of the opportunities in renewable energy generation. This would both mitigate the potential for further environmental damage and act as a catalyst for more and better jobs, higher incomes and improved social outcomes.

Child stunting in Tunisia: an alarming rise

Child stunting in Tunisia seemed to have fallen significantly over the past two decades. But as this column reports, new analysis indicates that the positive trend has now gone dramatically into reverse. Indeed, the evidence is unequivocal: the nutritional health of the country’s youngest citizens is rapidly deteriorating and requires immediate and decisive action.

Exchange rate undervaluation: the impact on participation in world trade

Can currency undervaluation influence participation in world trade through global value chains (GVC)? This column reports new evidence on the positive impact of an undervalued real exchange rate on the involvement of a country’s firms in GVCs. Undervaluation acts as an economy-wide industrial policy, supporting the competitiveness of national exports in foreign markets vis-à-vis those of other countries.

New horizons for economic transformation in the GCC countries

The countries of the Gulf Cooperation Council (GCC) have historically relied on hydrocarbons for economic growth. As this column explains ahead of a high-level ERF policy seminar in Dubai, emerging technologies like artificial intelligence, blockchain and robotics – what some call the fourth industrial revolution – present a unique opportunity for the region to reduce its dependence on oil and make the transition to a knowledge-based economy.

Egypt’s labour market: new survey data for evidence-based decision-making

As Egypt faces substantial social and economic shifts, understanding the labour market is crucial for designing policies that promote employment and inclusive economic growth. This column introduces the latest wave of the Egypt Labor Market Panel Survey, which provides fresh, nationally representative data that are vital for examining these dynamics.

Shifting public trust in governments across the Arab world

The Arab Spring, which began over a decade ago, was driven by popular distrust in governments of the region. The column reports on how public trust has shifted since then, drawing on survey data collected soon after the uprising and ten years later. The findings reveal a dynamic and often fragile landscape of trust in Arab governments from the early 2010s to the early 2020s. Growing distrust across many countries should raise concerns about future political and social instability.

Corruption in Iran: the role of oil rents

How do fluctuations in oil rents influence levels of corruption in Iran? This column reports the findings of new research, which examines the impact of increases in the country’s oil revenues on corruption, including the mechanisms through which the effects occur – higher inflation, greater public spending on the military and the weakness of democratic institutions.

More jobs, better jobs and inclusive jobs: the promise of renewable energy

Among the many economic and environmental challenges facing the countries of the Middle East and North Africa (MENA), two stand out: the need for jobs and the need to combat the threat of climate change by moving away from reliance on fossil fuels. As this column explains, embracing renewable energy technologies presents an opportunity for the region to diversify its economy, mitigate the possible negative impacts of digital technologies on existing jobs, reduce its carbon footprint and create significant levels of employment, particularly for women and the youth, across a variety of sectors.




LinkedIn