Financing Constraints and a Firm's Decision and Ability to Innovate: Establishing Direct and Reverse Effects

48 Pages Posted: 22 Sep 2010

See all articles by Vassilis Hajivassiliou

Vassilis Hajivassiliou

London School of Economics & Political Science (LSE) - Department of Economics

Frederique Savignac

University Paris-Est Créteil (UPEC)

Date Written: February 2008

Abstract

The paper analyzes the existence and impact of financing constraints as a possibly serious obstacle to innovation by .rms. The econometric framework we employ in our study is the simultaneous bivariate probit with mutual endogeneity of direct indicators of financial constraints and innovation decisions by firms. A novel method for establishing coherency conditions is used. It allows us for the first time to estimate models hitherto classified as incoherent through the use of prior sign restrictions on model parameters. We are thus able to quantify the interaction between financing constraints and a firm's decision and ability to innovate without forcing the econometric models to be recursive. Hence, we obtain direct as well as reverse interaction effects, leading us to conclude that binding financing constraints discourage innovation and at the same time innovative firms are more likely to face binding financing constraints.

Keywords: DSGE model, currency union, heterogeneity, matching frictions, welfare

JEL Classification: C51, C52, C15

Suggested Citation

Hajivassiliou, Vassilis and Savignac, Frederique, Financing Constraints and a Firm's Decision and Ability to Innovate: Establishing Direct and Reverse Effects (February 2008). Banque de France Working Paper No. 202, Available at SSRN: https://ssrn.com/abstract=1680212 or http://dx.doi.org/10.2139/ssrn.1680212

Vassilis Hajivassiliou (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Frederique Savignac

University Paris-Est Créteil (UPEC) ( email )

61 avenue du General de Gaulle
Creteil cedex, 94010
France

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