Financial Constraints and Innovation: Why Poor Countries Don't Catch Up

Abstract

We examine micro-level channels of how financial development can affect macroeconomic outcomes like the level of income and export intensity. We investigate theoretically and empirically how financial constraints affect a firm's innovation and export activities, using unique firm survey data which provides direct measures for innovations and firm-specific financial constraints. We find that financial constraints restrain the ability of domestically owned firms to innovate and export and hence to catch up to the technological frontiers. This negative effect is amplified as financial constraints force export and innovation activities to become substitutes although they are generally natural complements.JEL classification: O3, O16, F1, G3

Subsidies, financial constraints and firm innovative activities in emerging economies

“…9 Starting with 2008, the survey underwent changes in the questionnaire and methodology which aimed to improve cross-country comparability and to make it compatible with the Enterprise Surveys the World Bank has been implementing in other regions of the world since 2006. Earlier rounds of BEEPS have been used by Brown et al (2011), Gorodnichenko and Schnitzer (2013), Popov (2013), Hanedar et al (2014), while Ayyagari et al (2011) Gorodnichenko and Schnitzer (2013) analyse similarly defined variables using earlier rounds of BEEPS. In their UK SMEs analysis, Lee et al (2015) also define innovators as those firms which have introduced a new product in the previous 12 months.…”

“…Hajivassiliou and Savignac (2016) study whether French firms' innovative projects were delayed, abandoned or non-started due to one of the following reasons: unavailability of new financing, searching and waiting for new financing or too high cost of finance. Using responses to questions on how severe an obstacle is access to and cost of external funding for business operations, Gorodnichenko and Schnitzer (2013) show that firms' decisions to invest in innovative activities are sensitive to financial frictions. 6 Basically, Fazzari et al (1988) compare the results for the investmentcash flow relationship for several (the q, the neoclassical, and the accelerator) models of investment across firm categories according to their earnings retention.…”

“…Gorodnichenko and Schnitzer 2013;Ayyagari et al 2011), with the approach in the R&D subsidy literature (e.g. Aerts and Schmidt 2008;Czarnitzki and Lopes-Bento 2013), to account for the role of public subsidies on firm innovative activities.…”

“…Aerts and Schmidt 2008;Czarnitzki and Lopes-Bento 2013), to account for the role of public subsidies on firm innovative activities. The baseline empirical model specifies firm innovative activities as a function of subsidies received, firm financial strength, firm R&D effort and other controls: Benefiting from rich firm financial information, this study uses accounting data-based indicators for access to external funding (like Ayyagari et al 2011;Paunov 2012) and for availability of internal finance (as in Brown et al 2012)), as well as direct measures of financial constraints reported by firms (similar to Aghion et al 2012;Gorodnichenko and Schnitzer 2013). The use of alternative measures facilitates comparison with the extant literature, exploits the advantages brought by each approach and helps reduce concerns about the appropriateness of the financial constraints indicators used in this study.…”

“…Firm innovation is defined broadly to include the introduction of new products or services and upgrading an existing product line service, which is of great relevance for firms in emerging countries. Gorodnichenko and Schnitzer (2013) and Ayyagari et al (2011) use similarly defined firm innovation indicators and focus on the role of financial factors in such countries. These studies do not consider, however, the role of subsidies for firm innovation.…”