Elsevier

Technology in Society

Volume 64, February 2021, 101519
Technology in Society

Analysing the roles of CEO's financial literacy and financial constraints on Spanish SMEs technological innovation

https://doi.org/10.1016/j.techsoc.2020.101519Get rights and content

Highlights

  • CEO's financial literacy alleviates SMEs' financial constraints.

  • CEO's financial literacy provokes greater innovation capabilities in SMEs.

  • Relaxing Financial Constraints helps Technological Innovation in SMEs.

  • Relaxing Financial Constraints mediates in the relationship between financial literacy and Technological Innovation in SMEs.

Abstract

Drawing on human capital and upper echelons theories, this study analyses how CEO's financial literacy influences a firm's technological innovation and investigates the mediating role of alleviating financial constraints of Small and Medium-sized Enterprises (SMEs) in the former relationship. We develop and test hypotheses applying a Structural Equation Model to a sample of 310 Spanish SMEs. The results show that CEO's financial literacy exerts both a direct and an indirect impact, through alleviating financial constraints, on a firm's technological innovation.

Introduction

Financing plays a fundamental role in firm innovation [1,2] and represents a central research topic in finance and innovation management [3,4]. Accessing to financial resources allows organizations to invest strategically in the production factors necessary to develop competitive advantages [5]. However, SMEs often face financial restrictions to accessing the credit market and this limits their development [6]. Innovating often depends on the availability of cash, so financial constraints can be a serious obstacle to driving the firm innovative activity [7]. These decisions always have financial consequences and therefore, to be effective, entrepreneurs must have solid financial literacy [8]. Financial literacy is one of the most relevant skills for the development of SMEs [9], by minimizing the obstacles that occur in the credit market.

Although there is abundant literature on the relationships between financing and innovation, the role played by the financial literacy of the SME manager has been little explored [10]. The literature suggests that people with more financial literacy are more likely to participate in a wide range of recommended financial practices [11]. Therefore, financial literacy is an important tool for managing business finances [12]. However, financing is one of the main problems that SMEs face concerning their innovation activities [13] and one of the causes is the lack of financial skills of the owner or manager [14]. For this reason, it is important to analyse the mechanisms that SMEs managers have to promote access to financing and to be able to carry out their innovation activities. Previous research suggests that managers with a good financial literacy participate more actively in financial markets, by reducing information restrictions [15] and achieving more favourable access to credit [10]. Financial literacy, therefore, alleviating financial constraints, may be an important antecedent of technological innovation.

The objective of this work is to analyse, in the context of SMEs, the influence of financial literacy and financial restrictions on their capacity for technological innovation. For this, an empirical study is carried out on a sample of 310 Spanish SMEs, which have between 10 and 250 workers. The key research questions that this paper answers are: Can financial literacy help to reduce financial constraints for SMEs? Can financial literacy favour the outcomes of technological innovation directly? And indirectly, alleviating financial constraints? To address the former inquiries, we combine human capital and upper echelons frameworks to elucidate that the CEO's financial literacy, as one of attributes of top executives, enhances organization human capital endowment, and in turn, affects firm innovation. The answers to these questions have important implications, for both the firms' management and the establishment of public policies. The Spanish setting is especially interesting. The financing of technological innovation activities continues to be a limitation for Spanish firms [16]. Although various financial institutions are making a major effort to spread financial literacy [17], their position in relation to Europe is low [18,19]. In this context, transmitting to SMEs the benefits of financial literacy to augment their knowledge capacities [20] and facilitate innovation through proper management of their financial objectives [21], may be a key factor in driving technological innovation.

Financial literacy has been widely researched in the literature to examine the effects of financial literacy on individuals and households [22,23], but few papers have analysed the influence of financial literacy at the firm level. This paper adds to the existing literature on financial literacy on firms and provides new and important findings. Furthermore, this study contributes to the abundant literature on determinants of technological innovation. This article contributes to the growing empirical evidence regarding how financial literacy affect firm innovation in SMEs, which is still scarce, enriching the application of human capital and upper echelon theories. Specifically, this study demonstrates that technological innovation of SMEs can benefit from CEO's financial literacy doubly: from the positive direct effect but also from the favourable mediating role of alleviating financial constraints. In this sense, we provide empirical evidence about how much of the positive effect of financial literacy on technological innovation is due to the fact that SMEs with more financial literacy have better access to financing, inasmuch that greater investments in innovation can be allowed. Finally, the results obtained in the study include important managerial and public policy implications that reinforce the strategy of investing resources in improving financial literacy in SMEs to enhance, in the end, firm innovation.

This study has been structured in the following way: first, we determine the theoretical framework and develop research hypotheses. Second, we present the methods: the sample selection, data collection and variables definition. Third, we carry out the analysis of the results, and finally, we present the main conclusions, implications and future lines for research.

Section snippets

Financial literacy and technological innovation

Firm knowledge is one of the attributes considered necessary to improve human capital, along with other aspects such as skills or capabilities, which may be turned into productivity [24], being essential to innovate [25,26]. Human capital improves firm innovation and performance [27], while the lack of human knowledge diminishes the business innovation activities [28].

Education augments the capacity to innovate and increases the use of new technologies [29], improving the ability to receive and

Data

To carry out the empirical study, a sample of 310 Spanish SMEs has been used. The population of firms was obtained from the Spanish Central Business Directory [80]. The population of this study is Spanish SMEs with a size between 6 and 250 employees and was segmented according to two criteria: activity and size. The sectors have been established based on the classification in Manufacturing, Construction, Commerce and Services and the size strata of 6–9 employees, 10 to 49 employees, and 50 to

Hypotheses testing

Table 4 and Fig. 2 report the structural model results.

The effect of financial literacy on technological innovation is positive and significant (β = 0.18**), supporting H1, and suggesting that such managerial ability in SMEs may provoke greater innovation capabilities [21,42].

Furthermore, financial literacy significantly contributes to alleviating financial constraints (β = 0.24***) [47] and alleviating financial constraints positively influences on technological innovation (β = 0.17***). Our

Discussion

This paper focuses on studying how financial literacy helps to reduce financial constraints and increase technology innovation activities. This is done from an empirical study using a sample of 310 Spanish SMEs. The results have provided empirical evidence about the positive effect of financial literacy on technological innovation of SMEs. The former favourable effect may be explained partially by the fact that SMEs that have a greater level of executives’ financial literacy have better access

Funding

Data collection was partially supported by both the Spanish Association of Accounting and Business Administration (AECA), and the Firm Feasability Chair at the University of Malaga. The funding sources have no other involvement or decision in this research.

Avaliability of data

García Pérez de Lema, Domingo; Ruiz-Palomo, Daniel; Diéguez-Soto, Julio.

(2020), “Data about Financial Literacy, Financial Constraints and Technological Innovation on SMEs”, Mendeley Data, v1. https://doi.org/10.17632/prvx2pmxy6.1.

Code availability

Software application: Stata, v. 14. Statacorp.

Authors contribution statement

D.G. and D.R. conceptualized the present idea. D.G. and J.D. developed the theory and funding acquisition. D.R. designed the methodology and performed the computations. All authors participated in the design of the questionnaire, the sample selection, the analyses of the findings, the discussion of the results and conclusions. All the authors wrote both the original draft and the review and editing of the final manuscript.

Declaration of competing interest

Not applicable (the authors have no competing interests to declare.)

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