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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Financial Markets Group in its series FMG Discussion Papers with number dp629.
Date of creation: Mar 2009
Date of revision:
Contact details of provider:
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)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
- Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2003.
"Instrumental variables and GMM: Estimation and testing,"
StataCorp LP, vol. 3(1), pages 1-31, March.
- Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2002. "Instrumental variables and GMM: Estimation and testing," North American Stata Users' Group Meetings 2003 05, Stata Users Group.
- Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2002. "Instrumental variables and GMM: Estimation and testing," Boston College Working Papers in Economics 545, Boston College Department of Economics, revised 14 Feb 2003.
- Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2002. "Instrumental variables and GMM: Estimation and testing," United Kingdom Stata Users' Group Meetings 2003 02, Stata Users Group.
- Mathias Dewatripont & Philippe Aghion & Patrick Rey, 1999.
"Competition, financial discipline and growth,"
ULB Institutional Repository
2013/9619, ULB -- Universite Libre de Bruxelles.
- Akdoğu, Evrim & MacKay, Peter, 2008. "Investment and Competition," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(02), pages 299-330, June.
- Li, Huagang, 1999. "State factories in transition--openness, competition, and productivity," Journal of Development Economics, Elsevier, vol. 58(2), pages 429-462, April.
- N Dryden & Stephen Nickell & D Nicolitsas, 1996.
"What Makes Firms Perform Well?,"
CEP Discussion Papers
dp0308, Centre for Economic Performance, LSE.
- Gorodnichenko, Yuriy & Svejnar, Jan & Terrell, Katherine, 2008.
"Globalization and Innovation in Emerging Markets,"
IZA Discussion Papers
3299, Institute for the Study of Labor (IZA).
- Yuriy Gorodnichenko & Jan Svejnar & Katherine Terrell, 2008. "Globalization and innovation in emerging markets," NBER Working Papers 14481, National Bureau of Economic Research, Inc.
- Yuriy Gorodnichenko & Jan Svejnar & Katherine Terrell, 2008. "Globalization and Innovation in Emerging Markets," Working Papers 583, Research Seminar in International Economics, University of Michigan.
- Hajivassiliou, V. & Savignac, F., 2008.
"Financing Constraints and a Firm's Decision and Ability to Innovate: Establishing Direct and Reverse Effects,"
202, Banque de France.
- Vassilis Hajivassiliou & Frédérique Savignac, 2007. "Financing constraints and a firm's decision and ability to innovate: establishing direct and reverse effects," LSE Research Online Documents on Economics 4774, London School of Economics and Political Science, LSE Library.
- Vassilis Hajivassiliou & Frédérique Savignac, 2007. "Financing Constraints and a Firm’s Decision and Ability to Innovate: Establishing Direct and Reverse Effects," FMG Discussion Papers dp594, Financial Markets Group.
- Sean Cleary & Paul Povel & Michael Raith, 2003.
"The U-shaped Investment Curve: Theory and Evidence,"
- Cleary, Sean & Povel, Paul & Raith, Michael, 2007. "The U-Shaped Investment Curve: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(01), pages 1-39, March.
- Cleary, Sean & Povel, Paul E M & Raith, Michael, 2004. "The U-Shaped Investment Curve: Theory and Evidence," CEPR Discussion Papers 4206, C.E.P.R. Discussion Papers.
- Bena, Jan & Jurajda, Stepan, 2007.
"Which Firms Benefit More from Financial Development?,"
CEPR Discussion Papers
6392, C.E.P.R. Discussion Papers.
- Jan Bena & Stepan Jurajda, 2007. "Which Firms Benefit More from Financial Development?," CERGE-EI Working Papers wp330, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
- Povel, Paul & Raith, Michael, 2004. "Financial constraints and product market competition: ex ante vs. ex post incentives," International Journal of Industrial Organization, Elsevier, vol. 22(7), pages 917-949, September.
- Schmidt, Klaus M., 1997. "Managerial Incentives and Product Market Competition," Munich Reprints in Economics 19772, University of Munich, Department of Economics.
- Boubakri, Narjess & Cosset, Jean-Claude & Guedhami, Omrane, 2004. "Privatization, corporate governance and economic environment: Firm-level evidence from Asia," Pacific-Basin Finance Journal, Elsevier, vol. 12(1), pages 65-90, January.
- Acharya, Viral V & Subramanian, Krishnamurthy, 2007.
"Bankruptcy Codes and Innovation,"
CEPR Discussion Papers
6307, C.E.P.R. Discussion Papers.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (The FMG Administration).
If references are entirely missing, you can add them using this form.