FINANCIAL CONSTRAINTS AND INNOVATION: WHY POOR COUNTRIES DON'T CATCH UP

This paper examines micro-level channels through which financial development can affect such macroeconomic outcomes as level of income. Specifically, we investigate theoretically and empirically how financial constraints affect a firm's innovation activities. Theoretical predictions are tested...

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Bibliographic Details
Published in:Journal of the European Economic Association 2013-10, Vol.11 (5), p.1115-1152
Main Authors: Gorodnichenko, Yuriy, Schnitzer, Monika
Format: Article
Language:English
Subjects:
Budget constraint
Developing countries
Economic theory
Income
Innovation
Innovations
Macroeconomics
Monetary policy
New technology
O16
Studies
Survey data
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Summary:This paper examines micro-level channels through which financial development can affect such macroeconomic outcomes as level of income. Specifically, we investigate theoretically and empirically how financial constraints affect a firm's innovation activities. Theoretical predictions are tested using unique firm survey data, which provide direct measures for innovations and firm-specific financial constraints, as well as information on shocks to firms' internal funds that serve as firm-level instruments for financial constraints. We find unambiguous evidence that financial constraints restrain the ability of domestically owned firms to innovate and hence to catch up to the technological frontier.
ISSN:1542-4766
1542-4774
DOI:10.1111/jeea.12033