Article

Financing Source, Investment Decision and Performance of

Small and Medium Enterprises (SMEs): Evidence from
Vietnam
Abstract: Small and Medium Enterprises (SMEs) are an important part of the establishment of jobs
and worldwide economic development in most economies. Meanwhile, the appropriate types of
assets to invest in and funding sources in optimal returns for the organization, representing the
company's strong success and future possibilities. The research aims to evaluate how finance
sources and investment choices affect SMEs' performance in Vietnam. In this research, quantitative
approaches are proposed to prove the hypotheses. All regression models were run using Stata
software version 16.0 with a dataset of 2453 SMEs randomly selected in 10 provinces of Vietnam
between 2011 and 2015. From our results, investment decisions namely fixed assets investment and
own capital have a negative effect on firm performance. In contrast, debt tends to have a positive
effect, especially short-term debt. However, the use of over-high financial leverage will
negatively affect businesses. In addition to some factors related to company characteristics and
education, the gender of the business owner is also considered in this study.

Keywords: Financing source; Investment decision; Firm performance; SMEs; Vietnam

MSC: 97M30; 91B02; 62P05; 91B84

1. Introduction
By 2030, Vietnam's economy is anticipated to be among the fastest-growing [1]. This
result is an affirmation of the development of Vietnam, including the significant
contribution of SMEs. Vietnam has about 800,000 enterprises, of which SMEs account for
over 98% [2]. Due to its contribution to the accomplishment of several social-economic
objectives, including improved employment growth, output, promotion of exports, and
encouragement of entrepreneurship, the SME sector is generally recognized for its
importance on a global scale.
Financing sources have a great role and have greatly aided the growth of SMEs. An
important topic in managerial finance is financing sources that affect enterprises'
performance. Along with this topic, Zarrouk, Sherif, and Galloway (2020) [3]
demonstrated that access to financing sources has a significant impact on the performance
of SMEs. The study discovered that financial independence is increased by both private
funding and the availability of external sources, playing a crucial part in promoting
independence and improving SME performance.
Moreover, SMEs must spend heavily on technology, infrastructure, research, and
development if they wish to compete in the global market. Such advances necessitate
significant investment in assets, including tangible and intangible [4]. Murniati et al. [5]
claimed that investment choices and firm performance had a positive relationship. More
investment decisions are being made, and so will shareholder profitability. Investor
interest will be piqued by the rise in corporate profits, which can improve the operation
of the business.
However, there are still difficulties that SMEs have to face. SMEs have difficulty
accessing capital due to inaccurate financial statements and not having many fixed assets.
The majority of business owners will mortgage personal property to raise funds to keep
their operations running. The SME sector lacks enterprises of large enough scale to act as
“a tractor,” so it faces many difficulties in accessing and receiving technology transfer and
new management skills from the Foreign Direct Investment (FDI) sector, foreign
2 of 17

investors, and other foreign partners. Only a very small number of SMEs are eligible to
become partners in value supply chains because they are very limited in the capital. The
industries with competitive advantages in Vietnam (agriculture, textiles, apparel,
footwear, wood processing, processing, manufacturing, electronics, informatics...) are also
the main operating space of SMEs that still depends on a lot of raw materials, machinery
and equipment, as well as imported technology. Due to its small size, this business sector
faces numerous challenges, including the inability to access capital sources to invest in
cutting-edge equipment and technology to support production and business, a lack of
administrative experience, and the inability to compete and control the domestic market.
Realizing that it is still possible to exploit these relationships, the authors have
conducted this study. . In this research, we found financing sources and investment
decisions on the performance of SMEs in Vietnam. From the result, we make
recommendations for using financing sources to make appropriate investment decisions
to improve business performance.
This research aims to fill gaps in the writing on the impact of financing sources and
investment decisions on SMEs in Vietnam. First, most previous studies only focused on
enterprises included in the stock exchange; the data was taken on the exchange. In
contrast, our study focused on the data of SMEs in Vietnam from 2011-2015 conducted by
conducting a survey. Second, almost all the previous articles dealt with only one of two
topics: the influence of financing sources or investment decisions on the firm's
performance. Therefore, this study examines the correlation between three variables of
financing sources, investment decisions, and firm performance by including them in a
model to test. This is to help managers make financing choices, increase accuracy when
making investment decisions, and improve business performance in Vietnam. Third,
when considering the impact of funding sources, most studies only focus on the findings
of debt on firm performance. This study evaluates the results of financing sources from
both perspectives: own capital and debt. Fourth, there is little research on the effect of
investment decisions, especially fixed asset investment, on business performance.
Based on the information gathered, the authors develop the research paper based on
the following questions: Question 1.1: How do financing sources affect the performance
of SMEs? Question 1.2: How do investment decisions affect the performance of SMEs?
Question 1.3: How do financing sources affect investment decisions? Question 2: What are
the recommendations for SMEs on using financing sources to make proper investment
decisions to improve their firm performance?
This study's remaining sections are organized as follows. A review of the literature
is presented in Section 2. Section 3 provides details of the data and the empirical approach.
Section 4 now presents the primary empirical findings and discussion. Finally, Section 5
also offers some implications and discusses some of the research's limitations.

2. Literature Review
The theories underpinning this study's approach are the Modigliani-Miller theorem,
the Pecking order theory, and the Trade-off theory. In the original M&M theory [6], the
author claimed that in a perfect market, the value of the debt-leveraged firm is equivalent
to the value of the unleveraged firm. Said differently, the enterprise's value is unaffected
by the capital structure. Later, Miller and Modigliani developed a second version to better
appropriate to real-world conditions, which was altered in that the value of the leveraged
firm was more than the value of the unleveraged firm, equivalent to the current value of
the tax benefits from interest [7]. This shows the importance of debt in the enterprise's
performance and value. Despite the tax shield benefits from debt, the trade-off theory well
explains why businesses often use a combination of debt and equity financing. According
to this view, using debt financing has a number of drawbacks in addition to its tangible
advantages, chief among them being the costs associated with financial distress and
bankruptcy [8]. This requires businesses to use equity and debt appropriately to get the
best capital structure that balances risk and return. Pecking order theory talks about the
3 of 17

order in which managers prioritize funding investment opportunities. The first is through
internal financings, such as retained earnings, as they come straight from within the
business and reduce information asymmetry [9]. Then follows debt, and the last option is
external equity. The rational use of capital will help businesses achieve investment
efficiency and improve performance.
A growing number of empirical research examine the effects between financing
sources and firm performance. The relationship between own capital, debt, and firm
performance in management finance is important and often discussed. Prior studies have
been conducted to measure the effects of financing sources on firm performance. Doan et
al. [10] indicated that an increase in debt leads to a decline in the company's performance
because debt is a costly financing source. Besides, Iqbal et al. [11] found that debt
positively impacts a company's performance when the leverage value does not exceed the
equity value. Meanwhile, Prahalathan et al.[12] are unable to find a link between debt and
firm performance. Also, Berger et al. [14] argued that a lower own-capital ratio or higher
financial leverage is linked to enhanced firm performance.
The investment decision is a substantial contributor to the firm's performance.
Investment decisions have a positive effect on firm performance, as found in the study of
Akron et al. (2020) [15] and Bzeouich et al.(2019) [16]. In another piece of research,
Murniati et al. (2019) [5] investigated the effect of investment decisions on firm
performance. According to the findings, investment decisions positively and considerably
impact corporate profitability. In another study, Nurlela et al. (2019) [17] proved that
investment decisions have a negative impact on firm performance. The results of Risal et
al. (2017) [18] did not support the above results. The findings of multiple regression
analysis revealed that investment decisions did not affect firm performance.
Besides the relationship between investment decisions and firm performance,
financing sources are also crucial factors for companies. Non-fixed and fixed asset
investments are the two types of investment decisions [19]. Both types of firm investment
have a positive effect on informal loans, whereas both types of firm investment negatively
affect bank loans. Specifically, Hartwell et al. (2018) [20] found that surrounding
institutions may make relationships between formal finance, informal finance, and firm
investment change. This study's findings showed that when institutional quality
improves, small firms will find it advantageous to increase their usage of bank loans and
informal loans to enhance their investment values. Besides, leverage had a negative effect
on investment decisions found in studies by Phan et al. (2020) [21] and Mukhtar et al.
(2016) [22]. Nevertheless, in the findings of Mukhtar (2016), cash flows, profitability,
liquidity, and business size positively affect investment decisions. In this study, Figure 1
presents hypothesis development to investigate the relationship between financing source
(debt and own capital), investment decision as independent variables and firm
performance as dependent variable.

Figure 1. Hypothesis development

2.1. Financing sources

The effect of Financing sources on firm performance is an important and often
debated topic in management finance. Companies can utilize financial leverage to satisfy
their financial requirements to run, invest in, and grow their businesses [23]. The use of
debt finance, according to Agrawal and Knoeber (1996) [24], can enhance performance by
4 of 17

encouraging greater monitoring by creditors. Besides, enterprises also profit from tax
shields and improve their performance. In other words, using financial leverage can have
a beneficial impact on how well a company performs. This is in line with what many
previous studies have reported [25,26,11].
Agency costs theory suggests that capital structure choice may help mitigate these
agency costs. Under the agency costs hypothesis, an own low capital reduces the agency
costs of outside equity and increases firm value by constraining or encouraging managers
to act more in the interests of shareholders.
Under the efficiency-risk hypothesis, more efficient firms tend to choose relatively
low equity ratios. When a company does well, it typically has a high expected return. A
high expected return can be viewed as a substitute for own capital because it can be used
to calculate the firm's potential portfolio risk, such as distress, bankruptcy, or liquidation
[27, 14]. Previous research evidence supports the efficiency-risk hypothesis. Because of the
positive relationship between performance and expected return and the substitution
relationship between expected return and own capital, a company with higher
performance will use less own capital in its capital structure [28].
As we found, our empirical findings are compatible with the following:
Hypothesis 1 (H1). Financing sources have an impact on firm performance.
Hypothesis 1.1 (H1.1). Debt capital has a positive effect on firm performance.
Hypothesis 1.2 (H1.2). Own capital has a negative effect on firm performance.

2.2. Investment decision

Investment is one of the strategic acts that can affect corporate performance since
investment decisions are impacted by firm risk [29]. Because the sample enterprises with
a lot of fixed assets must spend a lot in depreciation, investment decisions negatively
influence profitability, and SMEs use a large amount of money that cannot be converted
into revenue immediately [30, 17]. Using capital to invest in assets may reduce the firm's
performance [31, 30]. As a result of the effect mentioned above of investment decisions for
fixed assets, we also test the effects on SMEs in this study.
Hypothesis (H2): International raw materials have negative effects on the firm performance.

2.3. Financing sources and investment decisions

Several studies have found that small enterprises frequently struggle to secure
adequate debt funds to support their investment projects [32- 34]. Because of the bad debt
situation in the financial system, banks are more cautious in setting credit requirements
[34]. Besides, the information asymmetry has caused banks to demand high-interest rates
to reduce potential risks [35]. Myers (1977) [36] studied the problems highly oriented firms
may have trouble obtaining funding to realize positive net present value initiatives. As a
result, excessive leverage can cause liquidity problems and reduce a company's ability to
finance expansion.
Furthermore, Vietnam's financial sector is still insufficient to convince business
people that their private property is safe from expropriation and corruption [37, 38] and
formal institutional structures are insufficient [39]. Enterprisers have one way to preserve
their wealth, which is to the amount of profit investment and additional equity investment
as they have more access to debts, resulting in a lower total investment value. As a result,
the following hypothesis is proposed:
Hypothesis 3 (H3). Financing sources have a negative effect on investment decisions

2.4. Financing sources and investment decisions with firm performance

As mentioned above, financing sources and investment decisions are particularly
important to the business. Financing sources reflect cash inflows, while investment
decisions include cash outflows. When investing in fixed assets, managers must consider
5 of 17

other investment decisions, how to use money effectively; and how a firm’s performance
is affected.
With the above mentioned, this paper puts three variables in the same model to test
the reliability of their correlation; our research hypotheses are as follows:

Hypothesis 4 (H4). Financing sources and investment decisions impact firm performance.

3. Methodology
3.1. Methodology
To provide the effects of financing sources and investment decisions on firm
performance, the regression model is used as follows:
Firm Performancei,t = βa i,t + β1Debt + β2Own capitali,t + β3Firm sizei,t+ β4Firm agei,t +

β5Experiencei,t + β6Genderi,t+ β7Educationi,t + Fixed effects + εi,t (1)

Firm Performancei,t = β i,t + β8 Fixed assets investmenti,t + β9 Firm sizei,t+ β10 Firm
agei,t + β11 Experiencei,t + β12 Genderi,t+ β13 Educationi,t + Fixed effects + εi,t (2)

Fixed assets investmenti,t = β i,t +β14 Debt + β15 Firm sizei,t+ β16 Firm agei,t + β17
Experiencei,t + β18 Genderi,t+ β19 Educationi,t + Fixed effects + εi,t (3)

Firm Performancei,t = β i,t + β20 Debt + β21 Own capitali,t + β2 Fixed assets investmenti,t
+ β23 Firm sizei,t+ β24 Firm agei,t + β25 Experiencei,t + β26 Genderi,t+ β27 Educationi,t +
Fixed effects + εi,t (4)

Where i is the firm and t is the year. Firm performance is measured in this study by
return on assets (ROA), which represents the productivity of firm operation in given
years. Along with all of the models proposed in this paper, we strengthen the accreditation
by including several fixed effects, such as year, industry, and sector fixed effects, to reduce
the risk of endogeneity. Those fixed effects capture all factors to avoid variations across
industries, years, and periods as shown in Table 1.
Debt, Own capital, and Fixed assets investment are our main independent variables.
We use those independent variables in our regression models to delve deeper into this
topic and determine the effects of those factors in Vietnam as shown in Table 1.
Following several previous studies, this paper employs specific firm-related
variables, such as size, firm age, gender, education, and experience, where size is
calculated as the natural logarithm of total assets, and firm age is calculated as the
logarithm of the firm's year of establishment plus one as shown in Table 1.
Additionally, gender is a dummy variable, one if the owner is male, zero is female;
likewise, Education is a dummy variable, one of the owners. In addition, the experience
of business owners is also regarded as a significant factor influencing firm performance,
which is measured as a natural logarithm of the number of years the owner takes over the
company (Table 1).

Table 1. Variables’ Desciption

Variables Measurement Referring Source
Firm performance Return on assets (ROA) SMEs Surveys
Debt Ln (Total debt + 1) SMEs Surveys
DTA Total debt divided by total assets SMEs Surveys
Short-term debt Ln (Short-term debt + 1) SMEs Surveys
Long-term debt Ln (Long-term debt + 1) SMEs Surveys
LEV Total debt divided by equity SMEs Surveys
Own capital Total assets minus total debt SMEs Surveys
Fixed assets investment The difference in fixed assets between two consecutive years' value to total capital SMEs Surveys
Firm size Ln (Total assets) SMEs Surveys
Firm age Ln (Operation years since firm’s establishment +1) SMEs Surveys
6 of 17

Experience Ln (The number of years the owner takes over the company) SMEs Surveys
Gender Dummy variables, one if the owner is male, zero is female SMEs Surveys
Education Dummy variables, one if the owner finished upper secondary, zero otherwise SMEs Surveys

3.2. Data Description

Vietnam serves as the study's experimental setting, therefore to test the hypotheses,
we used data from the Vietnam Small and Medium Enterprises Survey (VSMES), which
was produced through cooperation between the Central Institute for Economic
Management, Development Economics Research Group, and the World Institute for
Development Economics Research at the United Nations University (UNU-WIDER). The
VSMES statistics contain information on about 2500 small companies allocated in 10
provinces of Vietnam. The survey data set included details on the financial performance,
characteristics, employment, and investment of these enterprises, as well as a focus on the
socioeconomic development policies of the region in which they operate.
The dataset gathered statistics about Vietnamese SMEs from 2005 to 2015. However,
in order to condense the study's scope and give the most accurate and up-to-date data,
data from 2011 to 2015 are used in this empirical study. Although we want to update the
most recent data, stagnation has prevented the General Statistics Office and UNU-WIDER
from undertaking the SME survey regularly since 2015. As a result, the scope of the
research project is restricted to the years 2011 through 2015.
Concerning data processing, identification codes were used to organize and match
data. Businesses are added to the dataset using their unique IDs to produce a panel
dataset. Valuable enterprises were missing, and inaccurate responses were removed
during data screening. Concerning data processing, identification codes were used to
organize and match data. Businesses are added to the dataset using their unique IDs to
produce a panel dataset. Valuable enterprises were missing, and inaccurate responses
were removed during data screening. All variables were also winsorized at the 1st and
99th percentiles to exclude the impact of extreme variables [40]. Ultimately, the data
sample includes a maximum of 7,235 observations from 2,453 businesses in Vietnam
between 2011 and 2015.
The authors chose panel data to run in linear regression to assess the correct
and dependable association between financing sources, investment decisions, and firm
performance. If any of these assumptions are inaccurate, we may need to make
modifications or use other estimating methodologies to improve our results. As a result,
in step 2 of the regression analysis, we do a robustness test to guarantee the results.
Furthermore, we utilize province-year fixed effects and industry fixed effects in all of our
models to absorb the unobservable characteristics of various firms in a given industry,
province, and year.

4. Main Analysis and Discussion

4.1. Descriptive Statistic

Table 2. Descriptive statistics.

N Mean SD Min Max P25 P50 P75

ROA (Ratio) 7700 0.269 0.415 -0.147 2.541 0.047 0.125 0.316
ROE (Ratio) 7700 0.303 0.507 -0.398 3.200 0.049 0.133 0.348
Total Assets 7700 4,967.994 10,437.06 26.25 72,066.49 400 1484 4,581.785
Total Debt (VND million) 7700 485.884 1,796.581 0 13500 0 0 100
Own Capital (VND million) 7700 4,307.859 8,711.748 10 58,324.06 351.65 1322 4,189.51
7 of 17

Fixed Assets Investment

7700 411.219 1,394.036 0 10,000 0 1.1 120
(VND million)
Investment Decision (I/0) 7700 0.505 0.499 0 1 0 1 1
Firm Size 7700 7.207 1.729 3.268 11.185 5.991 7.302 8.43
Firm Age 7700 7.600 0.005 7.578 7.607 7.598 7.601 7.603
Firm Capital (Ratio) 7700 0.916 0.168 0.0002 1 0.912 1 1
Education (I/0) 7700 0.682 0.466 0 1 0 1 1
Experience 7700 7.600 0.034 4.595 7.608 7.598 7.601 7.603

Table 2 summarizes the statistics of all the variables to view the statistics of firms in
this dataset generally.
On average, the productivity of all firms is likely to be profitable regarding the ROA
index of 0.269 as well as the ROE index of 0.303. When it comes to the total debt of the
firms, the mean value of the variable equals 485.884 VND million, indicating a proportion
of nearly 10% of the total assets, which is considered relatively low. Since the proportion
of debt to total assets of the firms is relatively low, the share of owner capital dominates
the vast majority of the investment to the firm with 4,307.859 VND million, in which fixed
assets investment makes up 411.219 VND million. Likewise, investment decisions have
been made, accounting for 50.5% of all firms inferring a high yearning for investing.
Referring to other indexes, the average size of firms is 7.207, calculated based on the
natural logarithm of total assets. Besides, in mean value, firm age and owner experience
are supposedly equalled at 7.6. To the owner, most of them finished upper secondary
school with a percentage of 68.2.

4.2. Correlation Matrix

Table 3 uses a correlation matrix in order to verify the results between the correlation
of each used variable as well as consider the multicollinearity issue.

Concerning the correlation between ROA and Total Debt of the firm, the result points
out that to maximize productivity, firms should balance their debt and owner capital with
the coefficients of -0.088 and -0.198 (p < 0.001). Likewise, fixed asset investment has a
negative correlation of -0.085 (p < 0.001), showing that investing more in assets such as
equipment, machinery, transport, and factories would lower the ROA value. Regarding
other correlations, most of them are lower than 0.8; the highest one belongs to the
correlation between Experience and Firm age, 0.765 (p<0.001). Noting all the
aforementioned, our study is presumably not affected by the multicollinearity problem as
dictated in the study of …

Table 3. Correlation matrix.

1 2 3 4 5 6 7 8 9
(1) ROA 1
(2) Total Debt -0.0879*** 1
(3 )Own capital -0.198*** 0.414*** 1
(4) Fixed assets investment -0.0854*** 0.749*** 0.440*** 1
(5) Firm size -0.501*** 0.392*** 0.658*** 0.395*** 1
(6) Firm age 0.0223 0.0734*** 0.0477*** 0.0706*** 0.129*** 1
-
(7) Firm Capital -0.0442*** -0.506*** -0.0638*** -0.411*** -0.0938*** 1
0.0896***
(8) Experience -0.0142 0.0680*** 0.075*** 0.0709*** 0.163*** 0.765*** -0.0881*** 1
8 of 17

0.195*
(9) Education -0.0821*** 0.150*** 0.193*** 0.154*** 0.305*** 0.170*** -0.102*** 1
**
***p < 0.001, ** p < 0.01, * p < 0.05.
9 of 17

4.3. Regression Analysis

Table 4. The impact of financing sources, investment decisions, and firm performance.

(1) (2) (3)

VARIABLES Firm performance Firm Performance Firm Performance

Debt 1.12e-05*** 1.12e-05***

(2.88e-06) (2.88e-06)
Own capital 1.05e-05*** 1.05e-05***
(6.24e-07) (6.29e-07)
Fixed assets investment 3.66e-05*** 1.50e-05***
(3.41e-06) (4.34e-06)

Firm size -0.170*** -0.154*** -0.191***

(0.003) (0.003) (0.004)

Firm age 2.280* 1.338 1.875

(1.237) (1.247) (1.223)

Firm Capital -0.155*** -0.155*** -0.194***

(0.028) (0.026) (0.028)

Experience 6.389*** 4.427*** 4.425***

(1.545)
(1.552) (1.522)

Education 0.0465*** 0.044*** 0.046***

(0.009) (0.009) (0.009)

Constant -64.33*** -42.34*** -46.14***

(7.818) (7.911) (7.760)

Year FEs (Fixed-effects) YES YES YES

Province FEs YES YES YES
Sector FEs YES YES YES
Observations 7,661 7,661 7,661
R-squared 0.316 0.317 0.344
Robust standard errors are in parentheses. *** p < 0.01, ** p < 0.05, * p < 0.1.

In Table 4, the results of the relationship firm performance as ROA and financial
sources, owner capital, as well as fixed assets investment amount under the equation
mentioned in Sector 3 and the regression models with Year, Province, and Sector fixed
effects.
Overall, the results are separated into three categories in which we exemplify the
effect of a firm’s debt and owner capital on firm performance in the first column (1), the
volume of fixed assets investment and the productivity of the firm in the second one (2),
then we conclude by the summary of considering the effect of both three factors on firm’s
effectiveness.
10 of 17

Regarding the results posted in the first column, the coefficient between debt and
ROA imposes a positive linear and significant relationship indicating the higher debt
volume helps firms improve their operative effectiveness, with 7.54e-06 (p<0.01). This
inference supports our proposed hypothesis (Hypothesis 1); similarly, in the research of
Modigliani and Miller (1963), they claimed the value of a firm using debt is greater than
the value of a firm using only its equity since the interest expenditure helping them as a
tax shield, which means they can literally save more money for their income and
reinvestment. Also, the relationship between creditors can be improved, which directly
fosters the supervision of more transparency and the operation more fluency [24].
However, since all selected firms are small and medium manufacturing ones that may
find it relatively hard to be exposed to the lending institutions; therefore, the results show
the positive linear and significant effect of owner capital on firm effectiveness, with 1.08e-
05 (p<0.01).
Referring to the results in the second column, Fixed Assets Investment

Investing in fixed assets negatively impacts SMEs’ performance, with −0.014 (p <
0.01). Ndiaye et al. (2018) [30]discovered that short-term fixed-asset investments would
negatively impact firm performance since SMEs utilize a lot of money that cannot be
turned into revenue immediately. In addition, enterprises with a high fixed asset base
must spend a lot on depreciation. Investments that rely too heavily on fixed assets are not
profitable due to annual depreciation costs [41].
While financing sources and Investment decisions directly impact SMEs’
performance, we believe there is also a joint effect by which choosing financing sources to
invest in has an impact on SMEs’ performance. Debts appear to have an important role in
boosting SMEs' performance (the estimated coefficient of debts is 0.003 compared to -0.057
of own capital at p < 0.01). Specifically, it shows that (1) the positive association between
debt and firm performance does not change, and the impact of own capital on SMEs'
performance becomes more negative when the investment decisions factor is added.
Furthermore, (2) the negative impact of investment decisions on the SME’s performance
is still negative but has improved when debt financing is added (-0.014 as compared to -
0.012 at p < 0.01). This is explained by Berger and Bonaccorsi di Patti (2006) [14] when a
firm is subject to monitoring by creditors, supervision (from creditors) can reduce
investment and boost firm performance.
Firm size was found to be detrimental in terms of the control variables. This could be
justified by SMEs having few departments and a simple organizational structure. As a
result, workers have fewer communication issues, better information processing, and
increased decision-making efficiency [42, 43]. No significant influence by firm age or
owner’s experience was found in our study. However, education has a strong favorable
impact on performance. The research findings demonstrate that an owner’s education
boosts corporate profitability. According to Robinson and Sexton (1994) [44], education is
an inseparable characteristic of a successful manager with a great entrepreneurial drive.
Lucas (2017) [45] found that education increases knowledge, skills, psychology, and
confidence, all of which are essential for attaining the goals of the firm
Table 5. The impact of financing source - investment decisions

(1)
VARIABLES Investment decisions

Debt -0.006**
(0.002)
Firm size 0.139***
(0.012)
11 of 17

Firm age -0.023

(0.042)
Experience 0.037
(0.033)
Gender 0.008
(0.024)
Education -0.039
(0.026)
Constant -2.159***
(0.193)

Province-Year Industry YES

Observations 4,642
R-squared 0.131
Robust standard errors are in parentheses. *** p < 0.01, ** p < 0.05, * p < 0.1.

Regarding to Table 5, this study examined the effects of financing sources on

investment decisions after analyzing the effects of financing sources and investment
decisions on firm performance. Our finding delineates that debt and investment are
negatively correlated. Debt resulted in significant negative effects on the firm performance
(ROA), with -0.006 (p < 0.05). Since SMEs are in their infancy, there is little information
transparency, which makes Banks cautious when establishing credit requirements. At the
same time, banks may decrease their potential risks by requiring SME borrowers to pay
higher interest rates due to informational asymmetries [35]. Due to the high-interest rates
they must pay on their borrowing, SMEs may choose not to participate in projects with a
positive NPV. Myers (1977) [36] demonstrated that, with sufficiently high leverage,
positive net present value (NPV) projects could go unfunded because of the debt overhang
created by prior debt financing. Consequently, leverage may limit the effectiveness with
which investment opportunities are realized [46]. Alternatively, it could be that when
entrepreneurs have better access to debt, they may cut their profit investments and make
additional equity investments to safeguard their wealth, which lowers overall investment
values [19].

4.4. Additional Analysis

4.4.1. The impact of term debt on Firm performance.
Table 6. Effects of term debt on firm performance

(1) (2)
VARIABLES Short-term debt Long-term debt
Short-term debt 0.002***
(0.001)
Long-term debt -0.001
(0.001)
Own capital -0.071*** -0.081***
(0.016) (0.017)
Fixed assets investment -0.016*** -0.016***
(0.004) (0.004)
Firm size 0.001 0.013
(0.016) (0.017)
Firm age -0.005 -0.006
(0.011) (0.011)
Experience -0.017* -0.017*
(0.009) (0.009)
Gender -0.006 -0.007
12 of 17

(0.006) (0.006)
Education 0.019*** 0.020***
(0.007) (0.007)
Constant 1.174*** 1.163***
(0.048) (0.048)

Province-Year Industry YES YES

Observations 2,271 2,271
R-squared 0.321 0.318
Robust standard errors are in parentheses. *** p < 0.01, ** p < 0.05, * p < 0.1.

Table 6 indicated that coefficients of Short-term debt are 0.002 (p < 0; they have a
substantial effect meaning multiple sources of short-term debt positively influence the
firm performance. Businesses choose short-term debt to reduce costs as a result. This type
of debt is popular among the most lucrative companies because it can ease access and
finance their needed working capital [47]. According to the pecking order theory [9],
short-term debt significantly impacts firm success due to bank lending policies because
the higher the ratio of short-term debt, the greater the impact on the ability of the business
to refinance. According to Childs et al. (2005) [48], the use of short-term debt is encouraged
by financial flexibility, which significantly lowers the agency costs associated with
underinvestment and overinvestment.
Meanwhile, the estimated coefficient of Long-term debt in column (2) shows that the
firm performance is not operating by long-term debt; in other words, long-term debt does
not affect company activities.

4.4.2 Controlling for Non-linearity

Table 7. The non-linear model between Leverage and Firm performance

(1)
VARIABLES ROA
LEV 0.650***
(0.068)
LEV square -1.091***
(0.154)
Own capital -0.036**
(0.014)
Fixed assets investment -0.010***
(0.002)
Firm size -0.031**
(0.014)
Firm age -0.011
(0.008)
Experience -0.005
(0.007)
Gender -0.009**
(0.005)
Education 0.018***
(0.005)
Constant 1.144***
(0.038)

Province-Year Industry YES

13 of 17

Observations 4,596
R-squared 0.327
Robust standard errors are in parentheses. *** p < 0.01, ** p < 0.05, * p < 0.1.

According to Table 7, the estimated coefficients of LEV and ROA are 0.65 (p < 0,01),
while those of LEV squared and ROA are -1.091 (p < 0,01), they both reach 1% and are
statistically significant. The leverage has a positive impact on performance. Positive
associations between leverage and business performance have been found in many
studies. Indeed, Robb and Robinson (2014) [49] argue that utilizing debt to fund a
corporation increases performance since the returns it generates are higher than the
average interest rate paid for the leverage. However, the possibility exists that too high
leverage on performance is negative. In other words, when formal lending exceeds the
requirements of the company's operating strategy, it becomes a barrier to the company's
operations. The quadratic specification's potential impact on leverage and firm
performance may not be monotonous; it may shift from greater degrees of leverage-
positive to negative. According to Miller & Modigliani (1963) [7], businesses should use
debt as much as possible to increase company value. However, excessive use of debt also
incurs costs to the firm, such as agency and financial distress costs [50].

5. Conclusions, Implications, and Limitations

5.1. Conclusions
Using effective financing sources to evaluate profitable investment projects will aid
in increasing the firm's operational efficiency. As a result, this research aimed to address
and identify the effects of financing sources and investment decisions on firm
performance, which would help managers make financing choices when making
investment decisions and improve business performance. Therefore, this study explores
the relationships by using a total of about 2500 SMEs in the period 2011-2015 to
understand how using sources of financing effectively to invest in fixed assets helps firms
improve performance.
The impact of financing sources, investment decisions, and a number of other control
variables on the performance of SMEs have been considered. The effective use of financial
resources is a decisive factor in the company's performance. Debts will help companies be
more careful when using appropriate financial resources due to the supervision of the
firm's bank monitor. Moreover, using debt helps businesses benefit from tax shields,
helping companies reduce costs such as interest from profits. Despite facing some barriers
in accessing financial resources, debt has positively influenced performance.
For the same reason, financing sources negatively influence investment decision-
making information asymmetry, credit institutions demand high-interest rates. In
addition, excessive debt can cause liquidity problems and reduce a company's ability to
finance expansion, while owners reduce profit investment and invest more equity,
resulting in a total loss of capital—lower investment value. Therefore, small and medium-
sized companies should develop appropriate solutions for easier access to financial
resources, such as honesty in providing information to credit institutions. They also need
to deal with debt when the loan has turned into bad debt. SMEs need to h control over
oper cash flow, repay bank loans, and build a good credit history.
Allocation of financial resources to investment projects also significantly affects
performance. However, manufacturing companies that need t in fixed assets need a large
amount of money. Meanwhile, investment in fixed assets cannot bring immediate profits
to the company. Therefore, manufacturing companies need to carefully evaluate
investment projects while planning and making decisions for business performance.
Regarding the results of additional analysis, we investigate the impact of debt terms
on a firm's performance. In terms of debt maturity, long-term debt appears to have no
significant effect on performance. In contrast, short-term debt offers a positive estimated
coefficient since firms choose more active short-term debt solutions to reduce costs and
14 of 17

are popular among the most profitable companies because it has easy access to and
financing for their required working capital. In addition, short-term debt substantially
impacts a firm success due to bank lending policies.
Furthermore, firms often use debt as much as possible to maximize firm value.
However, excessive use of debt also incurs costs to the firm, such as financial distress costs
and agency costs.

5.2. Implications
According to the findings of our analysis, firm performance increases when used on
loans; this means that firms are strongly advised to seek out their financing source from
external financing (banks, financial markets) to invest and develop the company. Besides,
SMEs cannot optimize financial leverage by borrowing redundant via loans because they
will endure the financial burden of interest payments. SMEs should establish an optimal
capital structure because it is an important content in the capital management policy of an
enterprise. Therefore, the number of borrowings should be carefully evaluated while
planning and making decisions for firm performance. SMEs must be honest in
cooperating and providing information to credit institutions in the process of appraising
loan documents, as well as the process of checking using loan purposes and loan
processing once the loan has become bad debt. SMEs must control operating cash flow
well, repay bank loans and build a good credit history. Regarding investment decisions,
SMEs should diversify their investment portfolio, using appropriate financing sources to
make investment decisions for each portfolio.
The government has issued many policies to support enterprises and focus on SMEs.
However, the implementation of the policy also has many problems. First, the
recommendation for the government is to design support forms that are suitable for
businesses in each industry, field, and period. Support policies should be clear and
transparent. Simultaneously, some requirements must be relaxed to extend the
beneficiaries and minimize the procedures and processes for accessing support packages,
particularly the financial proofing method. It is necessary to extend the time of support
packages so that enterprises can complete the deferred and extended amounts in the past
to restore production and business. Secondly, it is necessary to independently review and
re-evaluate the effectiveness of the implementation of support policies and consult with
affected people to ensure the feasibility of the policies being enacted. Finally, a
recommendation for the government should be to reorganize and improve the
effectiveness of credit guarantee programs for SMEs.
To support SMEs, the central banks and lenders should propose measures to assist
in borrowing funds to improve firm performance strategies. Streamlining the application
process and providing reasonable interest rates for SMEs, facilitating their time savings,
accessing new opportunities, and promoting competitive market advantages. The central
banks should push credit institutions to loosen up credit approval conditions for SMEs
with good credit histories. In addition, formal institutions should provide SMEs with
short-term loans for financing short-term capital projects.

5.3. Limitations
Regarding hypothesis generation and data collection, our study has some limitations.
The model used by the authors is new at a basic level, so it is not yet highly accurate, so
future studies may synthesize all the regression models and different measures to
understand and learn more about these effects. Second, we only focus on the fixed assets
part of the investment decision. As a result, we cannot study all other factors influencing
investment decisions, so new studies should investigate other aspects of investment
decisions (e.g., research and development, upgrading human capital, patents) to make the
articles more diverse. Third, this study is only looking at the one-way effect of the
explanatory variables on the dependent variable; other researchers can learn more about
15 of 17

the relationship between the variables in the article when they have a two-way interaction.
Fourth , we wanted the most up-to-date data but were only able to carry out the study
using data for five years (2011 - 2015) because the stagnation prevented the General
Statistics Office and UNU-WIDER from proceeding with conducting SME surveys
regularly since 2015. This also makes the study's results not show the effect of the time
factor. For future studies, the authors suggest expanding research data such as using
recent research years to draw more reliable conclusions as well as reduce errors.

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