The Effect of Credit Rationing on the Shape of the Competition-Innovation Relationship
AbstractUsing a dynamic model of a step-by-step innovation race between financially constrained firms, I study how financial constraints affect innovation activity. The novel theoretical results derive from an analysis of the interaction between the incentive effect of competition on innovation and the effect competition has on the degree of credit rationing. I find that the negative effect of financial constraints on firm- and aggregate-level R&D investment is most pronounced at both high and low levels of competition. These predictions are supported by empirical evidence: The competition-innovation relationship has an inverted-U shape in less financially developed systems relative to the benchmark pattern observed in countries with highly developed financial systems. Innovation-enhancing policies implemented through competition reforms ought to be complemented by promoting financial development.
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Bibliographic InfoPaper provided by Financial Markets Group in its series FMG Discussion Papers with number dp629.
Date of creation: Mar 2009
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Web page: http://www.lse.ac.uk/fmg/
Other versions of this item:
- Jan Bena, 2008. "The Effect of Credit Rationing on the Shape of the Competition-Innovation Relationship," CERGE-EI Working Papers wp377, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-04-05 (All new papers)
- NEP-COM-2009-04-05 (Industrial Competition)
- NEP-INO-2009-04-05 (Innovation)
- NEP-KNM-2009-04-05 (Knowledge Management & Knowledge Economy)
- NEP-MIC-2009-04-05 (Microeconomics)
- NEP-TID-2009-04-05 (Technology & Industrial Dynamics)
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