R&D investment and financing constraints of small and medium-sized firms

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp08047.pdf Non-technical SummaryResearch and development (R&D) activities of firms can be seen as investments in the creation of knowledge. This basic fact makes raising funds for investment in R&D projects different from capital investment. R&D investment is not only characterized by high, sunk, firm-specific investment cost and low collateral value, but also by significant adjustment cost.Further, the creation of positive externalities and uncertainty of returns affect financing conditions for such projects. Hence, firms' R&D activities may be pursued at a sub-optimal level or not conducted at all if financing becomes too expensive or is not available at all.As investment in new knowledge is a crucial factor for the creation of wealth, from a society's point of view potential underinvestment is regarded as justification for government intervention to promote R&D investment. However, in order to design efficient support programs it is crucial to identify potentially constrained firms.This study analyzes both R&D investment and capital investment based on firm-level panel data. Thereby, the effects of internal and external funding resources for both types of investment are compared. A positive reaction of changes in the firms' funding resources is interpreted as an indication of the firms being financially constrained in their investment.Moreover, the models distinguish effects for firms of different size and different age. This allows us to identify attributes affecting the level of constriction for both types of investment.The results show that the availability of internal funds is more decisive for R&D investment than for capital investment. For both types of investment, we find a monotonic relationship between the impact of the constriction and firm size. The smaller the firms are, the more binding are financial constraints. Interestingly, capital investment reacts more sensitive to external constraints than R&D. We believe that this happens due to the fact that R&D is harder to finance through external resources in the first place. This is also reflected by the higher sensitivity of R&D to internal financial resources.When looking at age differences, the relationship between the level of constriction and R&D investment is non-monotonic. For capital investment, we cannot identify differences between different age classes. Das Wichtigste in Kürze (Summary in German) Abstr...

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