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R&D Intensity and Finance: Are Innovative Firms Financially Constrained?

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  • Ward Brown

Abstract

The assumption of perfect capital markets is least likely to be satisfied for the class of firms which devote resources towards the development of innovative products or processes. Existing tests of the impact of capital market imperfections on innovative firms cannot distinguish between two alternative hypotheses: (i) that capital markets are perfect, and that different factors drive the firms different expenditures, and (ii) that capital markets are imperfect, and that the different expenditures of the firm respond disproportionately to a common factor, namely shocks to the supply of internal finance. However, an implication of the perfect capital markets assumption is that each of the firms expenditures should be equally insensitive to fluctuations in internal finance. Therefore, to distinguish between these hypotheses, the sensitivity of physical investment expenditures to internal finance is compared across innovative and non-innovative firms. For robustness, several investment equations are estimated. The results support the hypothesis that innovative firms are financially constrained.

Suggested Citation

  • Ward Brown, 1997. "R&D Intensity and Finance: Are Innovative Firms Financially Constrained?," FMG Discussion Papers dp271, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp271
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    Cited by:

    1. Ansgar Belke & Rainer Fehn, "undated". "Institutions and Structural Unemployment: Do Capital-Market Imperfections Matter?," German Working Papers in Law and Economics 2001-default/2001/1-1008, Berkeley Electronic Press.
    2. Loof, Hans, 2004. "Dynamic optimal capital structure and technical change," Structural Change and Economic Dynamics, Elsevier, vol. 15(4), pages 449-468, December.
    3. Lööf, Hans & Heshmati, Almas, 2004. "Sources of Finance, R&D Investment and Productivity: Correlation or Causality?," Working Paper Series in Economics and Institutions of Innovation 11, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    4. Ansgar Belke & Rainer Fehn, "undated". "Institutions and Structural Unemployment: Do Capital-Market Imperfections Matter?," German Working Papers in Law and Economics 2001-default/2001/1-1008, Berkeley Electronic Press.
    5. Bronwyn Hall, 2004. "The financing of research and development," Chapters, in: Anthony Bartzokas & Sunil Mani (ed.), Financial Systems, Corporate Investment in Innovation, and Venture Capital, chapter 2, Edward Elgar Publishing.
    6. Berthold, Norbert & Fehn, Rainer, 2002. "Struktureller Wandel, new economy und Beschäftigungsentwicklung: welche Rolle spielen die institutionellen Rahmenbedingungen auf dem Kapitalmarkt?," Discussion Paper Series 53, Julius Maximilian University of Würzburg, Chair of Economic Order and Social Policy.
    7. Pasquale Lucio Scandizzo, 2004. "Financing Technology: An Assessment of Theory and Practice," CEIS Research Paper 43, Tor Vergata University, CEIS.
    8. Hall, Bronwyn H. & Lerner, Josh, 2010. "The Financing of R&D and Innovation," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 1, chapter 0, pages 609-639, Elsevier.
    9. Cohen, Wesley M., 2010. "Fifty Years of Empirical Studies of Innovative Activity and Performance," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 1, chapter 0, pages 129-213, Elsevier.
    10. Alexander Cobham, "undated". "The Financing and Technology Decisions of SMEs: I. Finance as a Determinant of Investment," QEH Working Papers qehwps24, Queen Elizabeth House, University of Oxford.

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