Do intangible assets help SMEs in underdeveloped markets gain access to external finance?-the case of Vietnam

The credit frictions encountered by small and medium-sized enterprises (SMEs) have been widely examined in the entrepreneurship literature. Although theory suggests that asset tangibility helps increase firms' borrowing capacity because it allows creditors to take possession of a firm's assets more easily, this paper provides new evidence about the role of intangible assets in reducing credit frictions for SMEs. Using an extensive dataset of more than 155,852 SMEs in Vietnam and a multivariate probit model, we find that identifiable intangible assets improve firm access to debt and equity finance. Interestingly, it is found that the friction-reducing effect of intangibles is stronger on debt finance than on equity finance, suggesting non-equivalent distributional effects of intangible assets on firm capital structure. Moreover, firm age and size can moderate the association between intangibles and access to the two sources of external finance. Plain English SummaryThe transition from a manufacturing-based economy towards one driven by technology and innovation is making firms' intellectual property and intangible assets important to their business models. We challenge the conventional presumption that asset intangibility is nonbankable, especially in less-developed financial markets. This study provides new evidence about the role of intangible assets in reducing credit friction for SMEs in Vietnam. Specifically, we find that intangible assets, especially those that are identifiable (e.g. software, databases, in-progress R&D, copyrights and the right to land use) are essential in determining firms' ability to raise external finance. We also find that the friction-reducing effect of intangibles is stronger on debt than on equity finance. Thus, the principal implication of this study is that equity investors in less-developed financial markets do not fully appreciate the value of intangible assets, whereas banks and professional lenders take intangibles into consideration in their lending decisions.

Automated summary

This paper provides new evidence on the role of intangible assets in reducing credit frictions for SMEs. The findings suggest that identifiable intangible assets can improve firms' ability to access debt and equity finance, with a stronger effect on debt finance. Furthermore, firm age and size can moderate the association between intangibles and access to external finance.