The paradox of investment timing in small business: Why do firms invest when it is too late?

Abstract

This paper aims to tell the "gamble of resurrection" story for small owner-managed firms.Analyzing a set of private firms in Vietnam, we find that firms that are less financially constrained, an increase in the degree of financing constraints leads to a decrease in the use of entrepreneurs' personal capital. However, once critical value of constraints is reached, this relationship reverses. Specifically, deferring investments that would otherwise be in time may result in firms' experiencing such serious financial distress that the entrepreneurs will invest their personal capital to try and maintain their firms' survival even it may be too late.

Local business environment, managerial expertise and tax corruption of small- and medium-sized enterprises

“…Most of prior entrepreneurship or small-business management studies often use terms 'managers', 'owners' and 'owner-managers' interchangeably. This is because, unlike in large firms where managers are often hired by shareholders to run the business, in SMEs, their owners often take the dual role as the managers (Kim, 2021;Nguyen et al, 2020). Jennings and Beaver (1995) also posit that owners play key roles in the management process of small enterprises by directly influencing the firms' operations and activities.…”

The ‘play’ of institutions and firm investment: Evidence from a transition economy

“…In systems where the formal rules are ambiguous or lack transparency, there may be scope for inconsistent interpretation. In addition, when the formal rules are inadequately enforced, entrepreneurs are more likely to perceive uncertainty in their operating environments (Di Vita, 2023; Nguyen et al, 2020).…”

“…Firms with fewer financial constraints (e.g., they are cash rich) are better able to finance their large‐scale and long‐term projects. They are theorised to be more active in economic activities than their more financially‐constrained counterparts (Nguyen et al, 2020) whose limited internal finance puts binding constraints on firm operations and the decision‐making processes related to, inter alia, investment. There is preliminary evidence that businesses that are less financially constrained are keen on pursuing higher value‐added projects, such as new product R&D (Guariglia & Liu, 2014), employment growth (Kao & Chen, 2020), and fixed asset expansion (Araujo et al, 2020).…”

“…In this saying, financing is likely to be more binding for small businesses in developing economies. Meanwhile, financing conditions will affect business plans and operation strategies, consequently the survival and the potential for growth (Du et al, 2015; Nguyen et al, 2020). For this reason, each firm, depending on its level of financial constraints, may obtain dissimilar benefits from different forces of external institutions, including local governance arrangements.…”

“…Our empirical analysis draws upon two data sources, including the Annual Enterprise Survey census data of Vietnam's small and medium‐sized enterprises (SMEs) from 2006 to 2019 and the Provincial Competitiveness Index (PCI), which has not only rich firm information but also some rarely available information on firms' financing conditions and the need for external finance (Nguyen et al, 2020; Tran, 2019). More importantly, the regions identified in the linked regional data show large variations in the institutional conditions, which provides excellent testability of our hypotheses.…”