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Financial Constraints And Innovation: Why Poor Countries Don'T Catch Up

  • Yuriy Gorodnichenko
  • Monika Schnitzer

This paper examines micro-level channels through which financial development can affect such macroeconomic outcomes as level of income. Specifically, we investigate theoretically and empirically how financial constraints affect a firm’s innovation activities. Theoretical predictions are tested using unique firm survey data, which provide direct measures for innovations and firm-specific financial constraints, as well as information on shocks to firms’ internal funds that serve as firm-level instruments for financial constraints. We find unambiguous evidence that financial constraints restrain the ability of domestically owned firms to innovate and hence to catch up to the technological frontier.

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File URL: http://hdl.handle.net/10.1111/jeea.2013.11.issue-5
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Article provided by European Economic Association in its journal Journal of the European Economic Association.

Volume (Year): 11 (2013)
Issue (Month): 5 (October)
Pages: 1115-1152

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Handle: RePEc:bla:jeurec:v:11:y:2013:i:5:p:1115-1152
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