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R&D Investment and Financial Frictions

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  • Oscar M. Valencia

Abstract

R&D intensity for small firms is high and persistent over time. At the same time, small firms are often financially constrained. This paper proposes a theoretical model that explains the coexistence of these two stylized facts. It is shown that self-financed R&D investment can distort the effort allocated to different projects in a firm. In a dynamic environment, it is optimal for the firm to invest in R&D projects despite the borrowing constraints. In addition, this paper shows that beyond a certain threshold, effort substitution between R&D and production appears. When transfers from investor to entrepreneur are large enough, R&D intensity decreases with respect to financial resources. Conditional on survival, the more innovative and financially constrained firms are, faster they grow and exhibit higher volatility.

Suggested Citation

  • Oscar M. Valencia, 2014. "R&D Investment and Financial Frictions," Borradores de Economia 11840, Banco de la Republica.
    • Handle: RePEc:col:000094:011840
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    More about this item

    Keywords

    Moral Hazard; Endogenous Borrowing Constraints; Technological Change.;
    All these keywords.

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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