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The impact of firm financing constraints on R&D over the business cycle

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  • Kadri Männasoo
  • Jaanika Merikull

Abstract

This paper studies financing constraints on R&D over the most recent boom and bust episode in Central and Eastern Europe (CEE). Given that financial and venture capital markets in CEE are thin in comparison to those in high-income economies and that many of CEE countries experienced a credit crunch during the last recession, it is proposed that financing constraints have a significant adverse effect on R&D activity in these countries. The paper uses two complementary firm-level data-sources from ten CEE countries. We find that financing constraints have a substantial effect on R&D expenditures, as the probability of credit constrained firms undertaking R&D activities is around 70% lower than for other firms and firms� R&D expenditure sensitivity to cash flow is very high. Despite the severity of the crisis, the adverse effect of financing constraints for R&D did not increase during the financial crisis. We also find that, conditional on credit constraints, firms� R&D activity is higher during a recession

Suggested Citation

  • Kadri Männasoo & Jaanika Merikull, 2015. "The impact of firm financing constraints on R&D over the business cycle," Bank of Estonia Working Papers wp2015-3, Bank of Estonia, revised 30 Dec 2015.
    • Handle: RePEc:eea:boewps:wp2015-3
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    More about this item

    Keywords

    R&D financing constraints; credit constraints; business cycle; Central and Eastern Europe;
    All these keywords.

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • P23 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Factor and Product Markets; Industry Studies; Population

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