Innovation activity and nancing constraints: evidence from Italy during the crises

Financial frictions may represent a severe obstacle for firms' innovative activity. This paper shows the existence and quantifies the effect of binding financial constraints on the innovation propensity of Italian companies. Once provided a rich baseline specification for innovation, I analyze the impact of financial constraints by exploiting a survey-based direct measure, enriched with a credit-score-index estimated ad hoc on a representative sample of confidential local bank ratings. A recursive bivariate probit model is employed to estimate the probability of undertaking innovative projects conditional on the likelihood of facing financial constraints. This econometric strategy accounts for possible correlations between these two features. My results show firms that are more likely to suffer from financial problems to have a probability of innovation that is 34% lower than financially-sound companies. Furthermore, instrumenting innovation with R&D into the financial-status equation, I control for a feedback effect of the innovation propensity on the financial status. As predicted by economic theory, most dynamic firms are shown to suffer from greater financial problems. This in turn is reflected onto a stronger depressive effect of financial constraints on innovation (-42%). This impact is shown to be sizable only for those firms with a higher ex ante probability to innovate, not being driven by a sub-group of most distressed companies. Finally, the last section deepens the role of firm size in alleviating the effects of financial frictions on a breakdown of three definitions of innovation. Relevant differences are found, especially for product and process--innovations.