Debt, Innovation, and Growth
61 Pages Posted: 13 Jul 2019 Last revised: 2 Jan 2020
Date Written: December 11, 2019
Recent empirical studies show that innovative firms heavily rely on debt financing. This paper investigates the relation between debt financing, innovation, and growth in a Schumpeterian growth model in which firms' dynamic R&D and financing choices are jointly and endogenously determined. The paper demonstrates that while debt hampers innovation by incumbents due to debt overhang, it also stimulates entry, thereby fostering innovation and growth at the aggregate level. The paper also shows that debt financing has large effects on firm entry, firm turnover, and industry structure and evolution. Lastly, it predicts substantial intra-industry variation in leverage and innovation, in line with the empirical evidence.
Keywords: debt, innovation, industry dynamics, growth
JEL Classification: G32, O30
Suggested Citation: Suggested Citation