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

Authors


  • The editor in charge of this paper was Fabrizio Zilibotti.

  • Acknowledgments: We would like to thank Olivier Coibion, Bronwyn Hall, Dietmar Harhoff, Bill Kerr, Patrick Kline, Klara Sabirianova Peter, Bruce Petersen, Oleksandr Talavera, John van Reenen, and Joachim Winter as well the editor, Fabrizio Zilibotti, three anonymous referees, and seminar participants at NBER, ASSA-Meetings in Denver, EBRD, SFB-TR, and UC Berkeley and at the Universities of Frankfurt, Geneva, Linz, Munich, and St. Gallen for comments and suggestions. This paper was partly written while Monika Schnitzer visited the University of California, Berkeley. She gratefully acknowledges the hospitality of the department as well as financial support by the German Science Foundation through SFB-TR 15. Gorodnichenko thanks NBER (Innovation Policy and the Economy program) for financial support.

Abstract

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.

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