Financial Constraints in Intangible Investments: Evidence from Japanese firms
This paper uses Japanese firm-level data to analyze empirically the financial constraints in intangible investments. We estimate investment functions in which cash flow is used as a key explanatory variable. We then observe differences in the sensitivity of investments to cash flow by the type of assets, industry, firm size, and firm age. According to the estimation results, investments in intangible assets are more sensitive to internal capital compared with investments in tangible assets, suggesting the existence of market failure in the financial markets. This market failure is more serious for small- and medium-sized enterprises (SMEs) and young firms. However, policies to promote investments are concentrated on tangible assets, with the exception of research and development (R&D) investment. This paper suggests that investment tax credits and financial support for SMEs and young firms should focus more on intangible investments.
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