Intangible Management Capital Financing Asymmetry
Financial institutions readily extend credit for physical assets that serve as collateral but refuse to finance intangible managerial improvements, consulting, or business training. This financing barrier prevents firms from adopting modern organizational practices that increase productivity.
Picture this
Think of a bank that readily lends money to buy a fast delivery van because they can repossess the vehicle if payments stop, but refuses to lend money for driving lessons even though proper driving prevents crashes and improves delivery efficiency.
What the evidence says
While large manufacturing firms routinely secure physical equipment financing exceeding $1,000,000, zero firms obtain commercial loans to hire management consultants due to lack of collateralizable physical assets and bank skepticism.
- Who
- Large Indian textile manufacturing plants with a median of $13.3 million in capital assets [4].
- How
- Field experiment analysis and observational evaluation of credit markets [3, 4, 11].
What to do
Allocate internal cash flows specifically toward managerial training and operational consulting rather than relying on collateral-based bank loans.
From the source
"First, while firms might easily obtain financing for physical capital investments, it might be harder to borrow to hire consultants or to finance business education for managers."
533 firm management AEA2010.pdf
Tagged
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