Did Bank Lending Stifle Innovation in Europe During the Great Recession?

40 Pages Posted: 11 Dec 2019

See all articles by Oana Peia

Oana Peia

University College Dublin (UCD)

Davide Romelli

Trinity College (Dublin) - Department of Economics; Trinity College (Dublin)

Date Written: November 2019


Using the 2008-09 Global financial crisis and the 2012 Euro area sovereign debt crisis as natural experiments, we investigate the effects of contractions in credit supply on R&D spending in a large sample of European firms. Our identification strategy exploits differences in financial constraints across firms, as well as the cross-industry variation in dependence on external finance, to identify a causal effect of bank credit supply on firm investment in innovation. We show that firms that are more likely financially constrained, in industries more dependent on external finance, have a disproportionally lower growth rate of R&D spending, as well as lower R&D intensity and share of R&D investment in total investment during periods of tight credit supply. These results are robust to different proxies of financial constraints, model specifications and fixed-effects identification strategies.

Keywords: financial frictions, investment, innovation, R&D spending

JEL Classification: O30, G21, I22

Suggested Citation

Peia, Oana and Romelli, Davide, Did Bank Lending Stifle Innovation in Europe During the Great Recession? (November 2019). Available at SSRN: https://ssrn.com/abstract=3492533 or http://dx.doi.org/10.2139/ssrn.3492533

Oana Peia (Contact Author)

University College Dublin (UCD) ( email )

Belfield, Dublin 4 4

Davide Romelli

Trinity College (Dublin) - Department of Economics ( email )

Arts Building
Room 3014

Trinity College (Dublin) ( email )

2-3 College Green
Dublin, Leinster D2

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