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Does development of financial markets help firm innovation? Evidence from China

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  • Jianbo Song
  • Zihao Su
  • Xiaoqun Nie

Abstract

This paper examines the impact of financial market development on firm R&D investment. Using hand-collected R&D investment data of 221 high-tech firms listed in China’s small and medium-sized board in the period of 2009–2015, we find that equity financing, particularly internal cash flow, is the main source for R&D investment of high-tech firms. Mature firms make more use of debt financing than young ones and are faced with less severe financial constraints. The development of financial markets relieves the dependence of R&D investment on internal capital, and the effect is more recognisable in young firms than in mature ones. However, the constraint of debt financing is not alleviated as much as that of equity financing by financial deepening, which suggests that debt markets still need developing, and more favourable policies are necessary for innovative firms.

Suggested Citation

  • Jianbo Song & Zihao Su & Xiaoqun Nie, 2018. "Does development of financial markets help firm innovation? Evidence from China," Economic and Political Studies, Taylor & Francis Journals, vol. 6(2), pages 194-208, April.
    • Handle: RePEc:taf:repsxx:v:6:y:2018:i:2:p:194-208
    DOI: 10.1080/20954816.2018.1463601
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    Cited by:

    1. Liu, Tao & Lu, Dong, 2019. "Trade, finance and endogenous invoicing currency: Theory and firm-level evidence," Pacific-Basin Finance Journal, Elsevier, vol. 56(C), pages 21-44.
    2. Nycil George & Anita Kerai, 2024. "Ordinary capabilities and firm performance: The role of capital market development," Asia Pacific Journal of Management, Springer, vol. 41(1), pages 233-274, March.

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