Financial constraints and the failure of innovation projects

Abstract

Abstract:Theoretical and empirical approaches have stressed the existence of financial constraints in firms' innovative activities. Although a large number of innovation projects are abandoned before their completion, the empirical evidence has focused on the determinants of innovation while failed projects have received little attention. This paper analyses the role of financial obstacles on the likelihood of abandoning an innovation project by using panel data of potential innovative Spanish firms for the period 2005-2013. Our analysis differentiates between internal and external barriers on the probability of abandoning a project and we examine whether the effects are different depending on the stage of the innovation process. Controlling for potential endogeneity, we use a bivariate probit model to take into account the simultaneity of financial constraints and the decision to abandon an innovation project. Our results show that financial constraints most affect the probability of abandoning an innovation project during the concept stage.

Financial Constraints and R&D Investment: The Moderating Role of CEO Characteristics

“…Since innovation usually requires more time and continuous investment than other generally organizational activities, the availability of R&D capital is a key factor that affects R&D investment of firms [6,9]. R&D activities of firms often require strong financing ability of firms to ensure a large amount of continuous resource input, especially capital input, to prevent the interruption of innovation caused by insufficient capital [8,12]. External financing is critical for reducing and alleviating the risk of R&D investment.…”

“…Fazzari et al [11] put forward the concept of financing constraints in their pioneering study, that is, some firms do not have sufficient access to external capital markets because of imperfections in markets for equity and debt. Firms are often confronted with financing constraints at different degrees, which restrict their innovation activities, leading to the failure of innovation projects and therefore restrain the firms' innovation behavior [12,13].…”

“…In recent years, innovation scholars began to analyze and study financing issues related to innovation, especially the impact of financing constraints on firms' innovation activities [6,12,14] However, on one hand, these studies have not obtained consistent conclusions yet. On the other hand, they were generally carried out according to institutional environment and firm characteristics.…”

The Relationship Between Financial Development and Innovation: Empirical Evidence from Selected Asian Countries

“…Empirically, financial barriers and market imperfections deteriorate innovation. As investigated by García-Quevedo et al (2018), the probability of abandoning an innovation project relies substantially on financial obstacles. Theoretical underpinnings for the relationship between financial barriers and the likelihood of failure of innovation projects can be traced back to the decade-old work of Mohnen et al (2008).…”

“…In the literature, the impact of financial markets on innovation is increasingly drawing scholars' interest. In particular, financial obstacles and market frictions are supposed to discourage innovation (Cabral and Mata, 2003;Hyytinen and Toivanen, 2005;Mohnen et al, 2008;García-Quevedo et al, 2018). Therefore, it is worth lessening financial barriers and spurring the development of financial markets to stimulate innovation.…”