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Financing Constraints and a Firm's Decision and Ability to Innovate: Establishing Direct and Reverse Effects

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Abstract

The paper analyzes the existence and impact of financing constraints as a possibly serious obstacle to innovation by .rms. The econometric framework we employ in our study is the simultaneous bivariate probit with mutual endogeneity of direct indicators of financial constraints and innovation decisions by firms. A novel method for establishing coherency conditions is used. It allows us for the first time to estimate models hitherto classified as incoherent through the use of prior sign restrictions on model parameters. We are thus able to quantify the interaction between financing constraints and a firm's decision and ability to innovate without forcing the econometric models to be recursive. Hence, we obtain direct as well as reverse interaction effects, leading us to conclude that binding financing constraints discourage innovation and at the same time innovative firms are more likely to face binding financing constraints.

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  • Hajivassiliou, V. & Savignac, F., 2008. "Financing Constraints and a Firm's Decision and Ability to Innovate: Establishing Direct and Reverse Effects," Working papers 202, Banque de France.
    • Handle: RePEc:bfr:banfra:202
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    More about this item

    Keywords

    DSGE model ; Currency union ; Heterogeneity ; Matching frictions ; Welfare.;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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