Credit where it's due: The synergy of trade credit and innovation in R&D-driven firms

In business transactions, information asymmetry poses significant challenges, particularly for innovative firms. This study investigates the strategic role of trade credit in overcoming these obstacles and fostering growth in R&D-investing companies. We hypothesize that firms offering more trade credit (H1) and investing in R&D (H2) can enhance their growth prospects. Furthermore, we propose that combining R&D investments and trade credit (H3) leads to greater growth than either activity alone, as trade credit facilitates the commercialization of R&D outputs while mitigating information asymmetry. We analyze trade credit's amount and duration using the Difference Generalized Method of Moments (GMM) to address potential endogeneity and firm-level heterogeneity. This is complemented with Fixed Effects Ordinary Least Squares (FE-OLS) estimations for robustness. Our findings are further supported through two-stage least squares (2SLS) and additional GMM analyses with an external instrument. The results reveal that while both R&D investments and trade credit supply individually contribute to growth, firms combining R&D with trade credit experience significantly higher growth rates. This highlights trade credit's critical role in facilitating the commercialization of R&D outputs. The findings also underscore the critical importance of communication and cooperation between business partners in fostering growth.