Facing funding barriers, euro zone firms use own cash for AI, ECB blog says

Euro Zone Firms Rely on Internal Cash for AI Amid Funding Barriers, Says ECB

Funding Patterns and Challenges for AI Investment in the Euro Zone

Internal Cash Dominates AI Investment

FRANKFURT, Oct 2 (Reuters) - Euro zone firms are mostly using their own cash to invest in artificial intelligence and face funding barriers, unlike their US counterparts which have gone on a global borrowing spree to fund their expansion, data from the ECB showed on Friday.

Comparison with US Tech Giants

US tech giants, often called hyperscalers or the Magnificent Seven, are investing hundreds of billions of dollars into rapid expansion and borrowing has been so high, they are crowding out others, including even sovereigns, from some debt markets.

Breakdown of Financing Methods

Preference for Internal Funds

The AI expansion in Europe is more modest, however, and 72% of firms say they will use internal funds such as cash flow or retained earnings to finance investment, the ECB said in a blog post.

Limited Use of External Finance

Around 16% said they plan to use bank loans, while 6% of firms mentioned equity and venture capital and only 1% were looking into debt securities, the blog post, which does not necessarily represent the ECB's views, said.

Barriers to External Funding

Structural Challenges in the Financial Ecosystem

"The limited role of external finance raises critical questions about potential barriers in the euro area’s financial ecosystem," the blog said, arguing that firms face hurdles when investing in intangible investments.

Collateral and Tangible Assets

Firms are more likely to rely on external funding when they invest into tangible assets such as hardware or data infrastructure as these could be used as collateral, the blog added.

Implications for Intangible Investment

"That may point to potential structural challenges that limit access to financing for intangible investment," the blog said.

Predominance of Single-Instrument Financing

Over 80% of firms said they plan to use just a single financing instrument, rather than a combination, and this was predominantly internal funds.

(Reporting by Balazs Koranyi;Editing by Alison Williams)