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Microeconometric Evidence of Financing Frictions and Innovative Activity

  • Amaresh K. Tiwari
  • Pierre Mohnen
  • Franz Palm
  • Sybrand Schim van der Loeff

Using Dutch data we empirically investigate how financing and innovation vary across firm characteristics. We find that when firms face financial constraints, debt financing and innovation choices are not independent of firm characteristics, and R&D slows down. In the absence of financial constraints, however, as they raise debt, firms become less inclined to innovate and the change in the propensity to innovate no longer varies with firm characteristics. We find that financing constraints faced, propensity to innovate, and R&D intensity are not uniform across firm characteristics. A new “control function” estimator toaccount for heterogeneity and endogeneity has been developed.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4645.

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Date of creation: 2014
Date of revision:
Handle: RePEc:ces:ceswps:_4645
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  1. Klette, Tor Jakob & Kortum, Samuel, 2002. "Innovating Firms and Aggregate Innovation," Memorandum 02/2002, Oslo University, Department of Economics.
  2. Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 285-315.
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  7. Wladimir Raymond & Pierre Mohnen & Franz Palm & Sybrand Schim van der Loeff, 2010. "Persistence of Innovation in Dutch Manufacturing: Is It Spurious?," The Review of Economics and Statistics, MIT Press, vol. 92(3), pages 495-504, August.
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  12. Elena Huergo & Jordi Jaumandreu, 2004. "How Does Probability of Innovation Change with Firm Age?," Small Business Economics, Springer, vol. 22(3_4), pages 193-207, 04.
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  15. Holmström, Bengt, 1989. "Agency Costs and Innovation," Working Paper Series 214, Research Institute of Industrial Economics.
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  17. Brown, James R. & Martinsson, Gustav & Petersen, Bruce C., 2012. "Do financing constraints matter for R&D?," European Economic Review, Elsevier, vol. 56(8), pages 1512-1529.
  18. Papke, Leslie E. & Wooldridge, Jeffrey M., 2008. "Panel data methods for fractional response variables with an application to test pass rates," Journal of Econometrics, Elsevier, vol. 145(1-2), pages 121-133, July.
  19. Whited, Toni M., 2006. "External finance constraints and the intertemporal pattern of intermittent investment," Journal of Financial Economics, Elsevier, vol. 81(3), pages 467-502, September.
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