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Financial constraints and innovation: Why poor countries don't catch up

  • Gorodnichenko, Yuriy
  • Schnitzer, Monika

This paper examines micro-level channels through which financial development can affect such macroeconomic outcomes as level of income. Specifically, we investigate theoretically and empirically how financial constraints affect a firm’s innovation activities. Theoretical predictions are tested using unique firm survey data, which provide direct measures for innovations and firm-specific financial constraints, as well as information on shocks to firms’ internal funds that serve as firm-level instruments for financial constraints. We find unambiguous evidence that financial constraints restrain the ability of domestically owned firms to innovate and hence to catch up to the technological frontier.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 20443.

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Date of creation: 2013
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Publication status: Published in Journal of the European Economic Association 5 11(2013): pp. 1115-1152
Handle: RePEc:lmu:muenar:20443
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Web page: http://www.vwl.uni-muenchen.de

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