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Did bank lending stifle innovation in Europe during the Great Recession?

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  • Oana Peia
  • Davide Romelli

Abstract

Using the 2008-09 Global Financial crisis and the 2012 Euro area sovereign debt crisis as natural experiments, we investigate the effects of contractions in credit supply on R&D spending in a large sample of European firms. Our identification strategy exploits differences in financial constraints across firms, as well as the cross-industry variation in dependence on external finance, to identify a causal effect of bank credit supply on firm investment in innovation. We show that firms that are more likely financially constrained, in industries more dependent on external finance, have a disproportionally lower growth rate of R&D spending, as well as lower R&D intensity and share of R&D investment in total investment during periods of tight credit supply. These results are robust to different proxies of financial constraints, model specifications and fixed-effects identification strategies.

Suggested Citation

  • Oana Peia & Davide Romelli, 2019. "Did bank lending stifle innovation in Europe during the Great Recession?," Working Papers 201926, School of Economics, University College Dublin.
  • Handle: RePEc:ucn:wpaper:201926
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    File URL: http://hdl.handle.net/10197/11198
    File Function: First version, 2019
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    References listed on IDEAS

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    3. Ferrando, Annalisa & Popov, Alexander & Udell, Gregory F., 2017. "Sovereign stress and SMEs’ access to finance: Evidence from the ECB's SAFE survey," Journal of Banking & Finance, Elsevier, vol. 81(C), pages 65-80.
    4. Tom Schmitz, 2016. "Endogenous Growth, Firm Heterogeneity and the Long-run Impact of Financial Crises," 2016 Meeting Papers 609, Society for Economic Dynamics.
    5. Oana Peia, 2017. "Banking Crises and Investments in Innovation," Working Papers 201727, School of Economics, University College Dublin.
    6. Iyer, Rajkamal & Da-Rocha-Lopes, Samuel & Peydró, José-Luis & Schoar, Antoinette, 2014. "Interbank Liquidity Crunch and the Firm Credit Crunch: Evidence from the 2007-2009 Crisis," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics, pages 347-372.
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    11. Federico Cingano & Francesco Manaresi & Enrico Sette, 2016. "Does Credit Crunch Investment Down? New Evidence on the Real Effects of the Bank-Lending Channel," Review of Financial Studies, Society for Financial Studies, vol. 29(10), pages 2737-2773.
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    More about this item

    Keywords

    Financial frictions; Investment; Innovation; R&D spending;

    JEL classification:

    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid

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