Financing Innovation and Growth: Cash Flow, External Equity and the 1990s R&D Boom
50 Pages Posted: 3 Aug 2010
Date Written: April 12, 2008
The financing of R&D provides a potentially important channel to link finance and economic growth, but there is no direct evidence that financial effects are large enough to impact aggregate R&D U.S. firms finance R&D from volatile sources: cash flow and stock issues. We estimate dynamic R&D models for high-tech firms and find significant effects of cash flow and external equity for young, but not mature, firms. The financial coefficients for young firms are large enough that finance supply shifts can explain most of the dramatic 1990s R&D boom, which implies a significant connection between finance, innovation, and growth.
Keywords: R&D, cash flow, equity finance, economic growth
JEL Classification: G30, O30, O40, D92
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