Economic policy uncertainty and SMEs’ investment efficiency in France: does competitive pressure matter?

Abstract

Purpose This paper aims to investigate empirically the impact of economic policy uncertainty (EPU) on small-to-medium enterprises’ (SMEs) investment efficiency and whether product market competition influences this association. Design/methodology/approach The study was conducted on French SMEs listed on the “CAC Mid & Small” Index over 2008–2021. This paper proposes a quantitative approach to test the relationship between the EPU and SME investment efficiency. Findings These findings show that EPU significantly alleviates SMEs’ investment inefficiency, reflected in the reduction of overinvestment and underinvestment. As EPU increases, firms with more exposure to such uncertainty invest more efficiently, and their overinvestment tendency becomes lower, while reducing the risk of underinvestment. These results are still significant after a series of robustness checks. Further analysis shows that EPU mitigates investment inefficiency to a greater extent for firms operating in highly competitive industries, and better information environments. Research limitations/implications This study was limited to the French EPU index and could be extended to a European or even international scale. Moreover, using alternative uncertainty indexes across various European countries can be more advantageous in further studies. Although results suggest that EPU affects investment efficiency, future studies could further explore the mechanisms through which EPU affects SMEs’ investment efficiency and, in particular, across different industries. Understanding these variations due to the specific industry-EPU sensitivity can provide valuable insights. Finally, it would be interesting to examine the risk management strategies adopted by SMEs in the face of EPU, combined with other growing risks, such as climate risk. Practical implications In the face of high EPU, SME managers must improve risk management, adopt appropriate investment strategies, consider using predictive analytics or economic forecasting tools and embrace technology and innovation that enhance agility and responsiveness to policy uncertainty. Besides, political decision-makers should adapt their regulatory policies (tax, labor, housing, etc.) to preserve the efficiency of SME investment. Originality/value Although the debates on how policy uncertainty affects the investment and financing of large businesses have received a great concern of academia, to the best of the authors’ knowledge, this is the first study that focuses on the effect of EPU on investment distortions for SMEs.