Mid-sized firms benefit more from investment, study finds

Large industries often invest in stakes in other companies, without, however, these investments having any great impact on their bottom line, i.e. sales and profits. On the other hand, similar investments by medium-sized industrial firms play an important role in boosting sales and profit although they increase indebtedness, according to a survey conducted by the Federation of Greek Industries (SEV). The survey, which covers the period 1998-2003, is an assessment of industrial firms’ investment strategies during the period. It examines a sample of 2,847 industrial firms on the basis of increases in their fixed assets. According to the survey, total gross investment by the firms in the sample amounted to 3.3 billion euros in 1999, rose in 2000 – there is no direct comparability because of adjustments in the value of land and buildings – exceeded 3 billion euros in 2001, and fell to 2.1 billion in 2002 and 1.5 billion in 2003. During the period 1999-2000, the bigger firms invested significantly in holdings of various kinds, such as shares and property, to which they held on during the following years. This indicates a tendency to expand, and this expansion was mainly implemented through partnerships or mergers. The value of holdings was equal to 21 percent of fixed assets in 1999 and 35 percent in 2003. There was a great increase in fixed assets in 1999-2000, but the rate of increase slowed down subsequently. This is not unexpected, given the great decline of the Athens Stock Exchange, which began in September 1999 and accelerated following the April 2000 national election. Investment helped sales, but the correlation is rather weak: There is little difference in sale rises between heavily investing firms and those that invested less. There is also little difference between gross profits and operational profits. As a result, the bigger industrial firms relied heavily on loans to invest, rather than draw capital from the stock market. Bank loans as a percentage of big firms’ outside sources of capital have become more important recently, reaching 70 percent in 2003. By contrast, there is a strong correlation between sale rises for mid-ranking industrial firms and their investments. In their case, holdings are a small part of fixed assets throughout the period examined, although a significant increase took place. Smaller industrial firms share many features with medium-sized firms: Those that made the heaviest investments posted the biggest increases in sales. Gains were seen throughout the period, with the exception of 2003. A unique feature of small firms is that they borrow much less than large- and medium-sized ones and that, when they do, they do so on far less favorable terms. Besides size, the sample’s firms were classified by the pace of investment. About 20 percent of the firms were deemed fast-paced investors, 60 percent medium-paced and 20 percent slow-paced. The latter category clearly had greater difficulty in increasing sales and their earnings margins were far lower. They also faced serious competitiveness issues. On the basis of the survey, SEV recommends policies that favor mergers and partnerships, allowing the bigger firms to boost their sales. It also recommends that subsidy programs focus on the slower-paced investors and that these programs be conditional on concrete improvements in sales and financial results. As for mid-sized firms, it recommends continuing encouragement to invest, while small firms should be helped with networking and finding sources of capital.