The Paradox of Investment Timing in Small Business: Why Do Firms Invest When It Is Too Late?

This paper aims to tell the “gamble of resurrection” story for small owner-managed firms that make personal capital investment their last resort strategy for resolving a liquidity problem. We use the dynamic investment model on a comprehensive survey dataset of SMEs in the transition economy of Vietnam, where access to finance remains a major business obstacle for firms. The empirical result reveals different regimes in firm financing investment behaviour that vary with the degree of internal and external financial constraints. This finding implies that for firms that are less financially constrained, an increase in the degree of financing constraints leads to a decrease in the use of entrepreneurs’ personal capital. However, once critical value of constraints is reached, this relationship reverses. Specifically, deferring investments that would otherwise be in time may result in firms’ experiencing such serious financial distress that the entrepreneurs will invest their personal capital to try and maintain their firms’ survival even it may be too late.