Do financing constraints matter for R&D?

Abstract

Information problems and lack of collateral value should make R&D more susceptible to financing frictions than other investments, yet existing evidence on whether financing constraints limit R&D is decidedly mixed, particularly in studies of non-U.S. firms. We study a large sample of European firms and also find little evidence of binding finance constraints when we estimate standard investmentcash flow regressions. However, we find strong evidence that the availability of finance matters for R&D once we directly control for: i) firm efforts to smooth R&D with cash reserves, and ii) firm use of external equity finance. Our study provides a framework for evaluating financing constraints when firms rely extensively on external finance and endogenously manage buffer stocks of liquidity to keep investment smooth, and our findings show that controlling for this smoothing behavior is critical for uncovering the full effect of financing constraints. Our findings also indicate a major role for external equity in financing R&D, highlighting a causal channel through which stock market development and liberalization can promote economic growth by increasing firm-level innovative activity.

Subsidies, financial constraints and firm innovative activities in emerging economies

“…7 Hall (2002) reports that R&D-intensive firms normally exhibit lower debt ratios than firms engaging less in R&D. Similarly, Brown et al (2012) find weak debt finance effects on the R&D investment of US quoted firms. On the contrary, using cross-sectional survey data, Ayyagari et al (2011) find a positive relation between access to external financing, most likely bank financing and the extent of firm innovation in emerging economies.…”

“…Czarnitzki and Hottenrott (2011a, b) propose using the empirical price-cost margin. Brown et al (2012) advocate the use of cash holdings, instead of cash flow, as it more accurately incorporates firm R&D smoothing behaviour in response to high adjustment costs. Aghion et al (2012) propose a payment incident variable as an indicator of firm credit constraints.…”

“…Kim and Weisbach (2008) suggest equity plays an important role in raising capital for R&D spending. Brown and Petersen (2009) and Brown et al (2012) estimate dynamic panel models and confirm the linkage between stock issues and R&D investment of US and European firms, respectively. Using panel data for 32 countries, Hsu et al (2014) show that overall market capitalization encourages innovation productivity (as measured by patenting).…”

“…A large strand of literature highlights that firm innovative activities are likely to be more severely affected by financial constraints than fixed capital investment due to the higher complexity, specificity and degree of uncertainty characterising innovation projects. Studies in this literature stream have focused on the role played by internal finance (Himmelberg and Petersen 1994;Mulkay et al 2001), cost and availability of external funding (Hall 2002;Brown et al 2012) and overall country financial development (Hsu et al 2014) for R&D investment.…”

WHY HAVE R&D-INTENSIVE INDUSTRIES IN JAPAN EXPERIENCED A RECENT DECLINE IN PERFORMANCE? EVIDENCE FROM PANEL DATA OF LISTED FIRMS IN JAPANESE R&D-INTENSIVE INDUSTRIES

“…If the adjustment cost is not negligible, then the assumption of strict monotonicity will not be allowed, and Equation (6) will not hold. Second, when the investment is liquidity constrained, it will depend on cash flow (Brown et al 2012). In such a case, the control function in Equation (6) will only capture part of the real productivity shocks.…”