The Effect of Credit Rationing on the Shape of the Competition-Innovation Relationship

65 Pages Posted: 12 Feb 2009

See all articles by Jan Bena

Jan Bena

University of British Columbia - Sauder School of Business

Date Written: February 11, 2009

Abstract

Using a dynamic model of a step-by-step innovation race between financially constrained firms, I study how financial constraints affect innovation activity. The novel theoretical results derive from an analysis of the interaction between the incentive effect of competition on innovation and the effect competition has on the degree of credit rationing. I find that the negative effect of financial constraints on firm- and aggregate-level R&D investment is most pronounced at both high and low levels of competition. These predictions are supported by empirical evidence: The competition-innovation relationship has an inverted-U shape in less financially developed systems relative to the benchmark pattern observed in countries with highly developed financial systems. Innovation-enhancing policies implemented through competition reforms ought to be complemented by promoting financial development.

Keywords: Innovation, R&D, Competition, Financial constraints, Credit rationing

JEL Classification: G15, G31, L13, O31

Suggested Citation

Bena, Jan, The Effect of Credit Rationing on the Shape of the Competition-Innovation Relationship (February 11, 2009). EFA 2009 Bergen Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1341466 or http://dx.doi.org/10.2139/ssrn.1341466

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University of British Columbia - Sauder School of Business ( email )

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