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Access to finance, product innovation and middle-income traps

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  • Agenor, Pierre-Richard
  • Canuto, Otaviano

Abstract

This paper studies interactions between access to finance, product innovation, and labor supply in a two-period overlapping generations model with an endogenous skill distribution and credit market frictions. In the model lack of access to finance (induced by high monitoring costs) has an adverse effect on innovation activity not only directly but also indirectly, because too few individuals may choose to invest in skills. If monitoring costs fall with the number of successful projects, multiple equilibria may emerge, one of which, a middle-income trap, characterized by low wages in the design sector, a low share of the labor force engaged in innovation activity, and low growth. A sufficiently ambitious policy aimed at alleviating constraints on access to finance by innovators may allow a country to move away from such a trap by promoting the production of ideas and improving incentives to invest in skills.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6767.

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Date of creation: 01 Feb 2014
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Handle: RePEc:wbk:wbrwps:6767

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Keywords: Labor Policies; Access to Finance; Debt Markets; Economic Theory&Research; Banks&Banking Reform;

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  1. Masayuki Hirukawa & Masako Ueda, 2011. "Venture Capital And Innovation: Which Is First?," Pacific Economic Review, Wiley Blackwell, Wiley Blackwell, vol. 16(4), pages 421-465, October.
  2. Holmström, Bengt, 1989. "Agency Costs and Innovation," Working Paper Series, Research Institute of Industrial Economics 214, Research Institute of Industrial Economics.
  3. Im, Fernando Gabriel & Rosenblatt, David, 2013. "Middle-income traps : a conceptual and empirical survey," Policy Research Working Paper Series 6594, The World Bank.
  4. Jesus Felipe & Arnelyn Abdon & Utsav Kumar, 2012. "Tracking the Middle-income Trap: What Is It, Who Is in It, and Why?," Economics Working Paper Archive wp_715, Levy Economics Institute.
  5. Hottenrott, Hanna & Peters, Bettina, 2012. "Innovative capability and financing constraints for innovation: More money, more innovation?," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 09-081 [rev.2], ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. Maskus, Keith E. & Neumann, Rebecca & Seidel, Tobias, 2012. "How national and international financial development affect industrial R&D," European Economic Review, Elsevier, Elsevier, vol. 56(1), pages 72-83.
  7. Filipe Silva & Carlos Carreira, 2012. "Do financial constraints threat the innovation process? Evidence from Portuguese firms," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 21(8), pages 701-736, November.
  8. Hirukawa, Masayuki & Ueda, Masako, 2008. "Venture Capital and Innovation: Which is First?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7090, C.E.P.R. Discussion Papers.
  9. Shekhar Aiyar & Romain A Duval & Damien Puy & Yiqun Wu & Longmei Zhang, 2013. "Growth Slowdowns and the Middle-Income Trap," IMF Working Papers 13/71, International Monetary Fund.
  10. Anna Ilyina & Roberto Samaniego, 2011. "Technology and Financial Development," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 43(5), pages 899-921, 08.
  11. Dinopoulos, Elias & Thompson, Peter, 2000. "Endogenous growth in a cross-section of countries," Journal of International Economics, Elsevier, Elsevier, vol. 51(2), pages 335-362, August.
  12. Holmstrom, Bengt, 1989. "Agency costs and innovation," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 12(3), pages 305-327, December.
  13. Philippe Aghion & Peter Howitt, 2009. "The Economics of Growth," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 9780262012638, December.
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