External finance and the growth of rural and urban SMEs in England

Article Date: 20 December 2024
Authors: Amr Khafagy, Thao Nguyen, Matthew Gorton, Jeremy Phillipson

Summary

This study uses the UK Longitudinal Small Business Survey and an extended pooled ordered probit model (with firm- and year-effects) to test how external finance affects turnover growth for small and medium-sized enterprises (SMEs) across rural and urban locations in England. The authors find that access to external finance has a stronger positive effect on growth for rural firms than for urban counterparts. The effect holds for both microbusinesses and larger SMEs, and is partly explained by fewer perceived direct competitors in rural areas (competition voids). Results remain robust after controlling for firm characteristics and endogeneity.

Key Points

Data source: UK Longitudinal Small Business Survey (panel data across multiple years).
Method: extended ordered probit model with firm- and year-fixed effects to account for unobserved heterogeneity.
Main finding: external finance boosts growth more strongly for rural businesses than urban ones.
Effect applies to both microbusinesses and SMEs, not just larger firms.
Fewer direct competitors in rural areas (competition voids) positively moderate the finance–growth link.
Findings are robust to controls and tests for endogeneity.
Policy relevance: geography matters — finance access gaps can hinder rural economic development.

Context and relevance

SMEs are crucial for regional development; understanding geographic differences in the returns to external finance matters for policymakers, investors and support organisations. The paper links to broader evidence that equity markets (angels, VC) concentrate in cities, especially London, which can exacerbate rural–urban finance disparities. For anyone involved in rural enterprise development, local economic policy or SME finance, this research provides empirical evidence that improving rural firms’ access to finance could yield proportionally larger growth benefits than similar interventions in urban areas.

Why should I read this?

Short and blunt: if you care about where to target SME finance or how to get better growth bang for your funding buck, this is worth five minutes. The study shows that money matters more in the countryside — so nudging lenders, investors or local programmes to plug rural finance gaps could pay off. It’s punchy, evidence-led and gives a clear steer for policy and practice.

Source

Source: https://www.tandfonline.com/doi/full/10.1080/00472778.2024.2436985?af=R