Sources of Funds for Business Investments: Non-financial Corporate Sector and Small and Medium-sized Enterprises (SMEs)

Abstract

The profitability of the non-financial business sector increased considerably from the early 1990s until the Great Recession, but investment in capital stock was weak. There seems to be some evidence that the ‘preference channel’ and the ‘internal means of finance channel’ constrained investment in capital stock under the conditions of financialisation and the increasing shareholder value orientation of management. Increasing received financial profits (interest and dividends) indicate an increasing orientation of the management of non-financial corporate business towards investment in financial assets, as compared to investment in capital stock (‘preference channel’). And increasing dividends paid out to shareholders indicate a decrease in internal means of finance available for fixed investment purposes (‘internal means of finance channel’). As in other countries, internal means of finance have been the most important source of investment finance for German corporations; the contributions of equity issues have historically been negligible and they have been negative since the mid 1990s, indicating share buybacks in this period. Bank credit, as well as corporate bond issues, have not been necessary for real investment finance but have been used for the acquisition of financial assets since the mid-1990s. SMEs and non-corporate firms also finance investment predominantly from internal sources. Periods of high investment are associated with increasing credit and increasing debt-capital ratios. The decline in credit to non-corporate firms since the financial and economic crisis has been mainly caused by a lack of demand for the output of these firms, and not by a lack of access to credit.