Product Innovation and Credit Market Disruptions

Abstract

We combine micro-level product barcode data for the consumer goods industry obtained from Nielsen with the Community Reinvestment Act (CRA) and Dealscan lending datasets to provide new evidence that credit market disruptions significantly affected the rate, novelty, and performance of product innovation during the recent financial crisis. We find that credit market disruptions did not affect the rate of introduction of new products on firms' existing product lines but limited their expansion to new product lines. Moreover, products created by firms experiencing credit market disruptions contain fewer novel product characteristics. Consistent with a credit frictions channel, these effects are concentrated in firms that are smaller, younger, and more dependent of external sources of finance. Our estimates further indicate that products introduced in new categories by credit-constrained firms during the financial crisis generate less revenues than products introduced in new categories by the same firm during normal times. Overall, our findings suggest that disrupted credit markets disrupt radical product innovation.

Keywords: Innovation; Multi-Product Firms; Financial Constraints; Great Recession

JEL Classification: G11, G21, G31, G32, L15, L25, O31, O32