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Financing Constraints, Radical versus Incremental Innovation, and Aggregate Productivity

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  • Andrea Caggese

Abstract

I provide new empirical evidence on a negative relation between financial frictions and productivity growth over firms' life cycle. I show that a model of firm dynamics with incremental innovation cannot explain such evidence. However also including radical innovation, which is very risky but potentially very productive, allows for joint replication of several stylized facts about the dynamics of young and old firms and of the differences in productivity growth in industries with different degrees of financing frictions. These frictions matter because they act as a barrier to entry that reduces competition and the risk taking of young firms.

Suggested Citation

  • Andrea Caggese, 2016. "Financing Constraints, Radical versus Incremental Innovation, and Aggregate Productivity," Working Papers 865, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:865
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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