Can Corporate Debt Foster Innovation and Growth?
71 Pages Posted: 13 Jul 2019 Last revised: 18 May 2021
Date Written: May 18, 2021
Recent empirical studies show that innovative firms heavily rely on debt financing. Debt overhang implies that debt hampers innovation by incumbents. A second effect of debt is that it stimulates innovation by entrants. Using a Schumpeterian growth model with endogenous R&D and financing choices, we demonstrate that this second effect always dominates, so that debt fosters innovation and growth at the aggregate level. Our analysis suggests that the relation between debt and investment is more complex than previously acknowledged and highlights potential limitations of empirical work that focuses solely on incumbents when measuring the effects of debt on investment.
Keywords: debt, innovation, industry dynamics, growth
JEL Classification: G32, O30
Suggested Citation: Suggested Citation