Dynamic financial constraints and innovation: Evidence from the UK innovation surveys

with Andrea Mina

Abstract: Does innovation cause financial constraints? And how do financial constraints affect firm innovation activities? In this paper we address the challenge of separating bi-directional causal effects in the relationship between innovation and financial constraints. Using the longest panel that can to date be derived from the UK Innovation Surveys, we construct novel simultaneous equations models with indicators for innovation, including expenditures for internal and external R&D, product innovation and process innovation, and for perceived financial constraints. The empirical analysis reveals a persistent impact of innovation inputs, and also outputs, on the likelihood that firms experience financial constraints. This effect is strongest for the observation of an R&D programme and relatively weak for R&D expenditures. Innovation outputs in the form of products new to the market seem to cause financial constraints – an important finding from a policy perspective. The reverse effect of financial constraints on innovation appears negligible.

Available here (latest version: September 2013).

We won the best paper award at this year’s CONCORDi conference on “Financing R&D and innovation for corporate growth in the EU: Strategies, drivers and barriers” for Andrea Mina’s and my paper on “Dynamic financial constraints and innovation: Evidence from the UK innovation surveys”. Thanks to the conference team for an exceptionally productive time in Seville and the conference participants for their encouraging and constructive comments!

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