R&D, Innovation and Liquidity Constraints

We study the effect of financing constraints on the decision to do R&D and on the level of R&D investment using survey data and complete financial accounting data on a large number of Italian manufacturing SMEs from 2001 to 2003. We use a direct indicator of credit constraints and employ an econometric approach allowing for the existence of binding financing constraints to be endogenously determined. We find that there is a significantly negative effect on the probability to set up R&D activities due to the presence of financing constraints, ceteris paribus. We also find that ignoring the endogeneity of the financing constraints indicator and the sample selection originating from firms not interested in doing R&D induces a bias in the estimated effect, which turns out to be positive and significant. We find the same result when studying the effect of liquidity constraints on R&D spending and are able to show that its reduction of liquidity constraints is largely to be associated with the reduction in the likelihood to do R&D (the R&D participation decision), rather than with a reduced level of investment. Finally, but importantly, firms that are both young and small appear to have additional difficulties in obtaining financing - even after controlling for both size and age - and disply a higher probability of being subject to credit constraints, ceteris paribus.