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Financial market integration and the effects of financing constraints on innovation

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  • Heller, David

Abstract

This paper investigates the effects of financial market integration on firm-level external debt financing and subsequent inventive activities. To this end, I exploit the implementation of the Financial Services Action Plan (FSAP) as a positive exogenous shift integrating European banking markets during the 2000s. My findings show that higher integration relaxes financing constraints, with significant positive effects on firms’ use of debt and interest burden, particularly for ex-ante financially constrained firms. Moreover, financial integration spurs innovative activities in terms of patenting of those firms that benefited from the reforms. Considering a variety of qualitative dimensions shows that lifting financing constraints improves patent quality for a subset of previously constrained firms with low ex-ante patenting intensities (entrants) while adversely affecting the inventive output of incumbent patentees in the spirit of a quantity–quality tradeoff. These findings highlight the key function of a conducive financing environment for inventive activities but also reveal unintended limitations of policy-induced improvements in access to financing.

Suggested Citation

  • Heller, David, 2024. "Financial market integration and the effects of financing constraints on innovation," Research Policy, Elsevier, vol. 53(4).
    • Handle: RePEc:eee:respol:v:53:y:2024:i:4:s0048733324000374
    DOI: 10.1016/j.respol.2024.104988
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    Keywords

    Financing innovation; Financial integration; Patents; Innovation quality; Debt financing;
    All these keywords.

    JEL classification:

    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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