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Firm Collateral and the Cyclicality of Knowledge Intensity

  • Martinsson, Gustav

    ()

    (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)

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    The Schumpeterian view on Business cycles treats recessions as a cleansing mechanism and a state where firms can regroup and innovate. Firms need to access finance externally in order to compensate declining cash flow in recessions. Due to financial frictions, the literature proposes that firms need to post collateral in order to mitigate problems of information asymmetries. In this paper I view knowledge within a firm as a prerequisite for it to be innovative. Combining financial frictions and firm knowledge intensity the overall hypothesis of this paper is: Firms which have collateral can retain its knowledge intensity when cash flow declines. This enables firms with collateral to benefit from recessions like Schumpeter proposed. In this paper I explore the impact of firm collateral on the cyclicality of knowledge intensity. This is conducted through using firm level data on 14,500 Swedish manufacturing firms over the period 1997-2004. The main results are: (i) the knowledge intensity of a firm without collateral is pro-cyclical. I.e. its share of highly educated employees is positively correlated with sales variation; (ii) on the other hand, the knowledge intensity of firms with collateral is counter-cyclical. Through retaining their knowledge intensity even as sales drops firms with collateral can benefit from recessions as Schumpeter proposed.

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    Paper provided by Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies in its series Working Paper Series in Economics and Institutions of Innovation with number 134.

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    Length: 34 pages
    Date of creation: 09 Sep 2008
    Handle: RePEc:hhs:cesisp:0134
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    CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden

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