Plain English Summary We show that small- and medium-sized enterprises (SMEs) located outside the main city regions are more dependent on internal cash flow in their investments compared to SME urban city regions. Our findings clearly show that, as access to agglomerated economies decreases, financial constraints faced by the SMEs increase. The investment ability of SMEs in rural regions depends on own cash flow more but revenues in smaller regions tend to be smaller too-implying that the cash flow is likely to be lower. As a result, SMEs in smaller and more remote places would find it harder to invest and, therefore, to grow or increase productivity. The fact that such a consistent pattern of increasing investment-cash flow sensitivity is clearly observable in Sweden, one of the least regionally unequal countries, only reinforces the importance of considering the spatial dimension in policies targeted at closing SME financing gap. It is well established that there is uneven availability of credit across space, in particular for SMEs. The evidence on whether this translates into differences in actual business investments remains scarce. We assess this question by using firm-level data for Swedish firms and estimate the extent to which the average investment-cash flow sensitivities of firms vary across the urban-rural hierarchy. We find that the world of financing is not yet flat for the majority of Swedish SMEs. Companies located in non-metro regions are most dependent on own cash flow in their investments. The results hold for all firms, firms of different sizes, firms operating in low-end services, unaffiliated firms and those belonging to domestic corporations. In contrast, investment-cash flow sensitivity of firms operating in high-tech services and those belonging to a multinational enterprise does not differ geographically. On average, regional investment-cash flow sensitivity is lower in bigger, denser and more educated local labour market regions; it is higher in regions with greater concentration of SMEs.
open access