Financial development and innovation: Cross-country evidence

Abstract

intensiveness at the country level), alternative proxies for financial market development, alternative proxies for high-tech intensiveness, and alternative innovation proxies defined at the technology class level.Collectively, these tests help us understand where the variation that drives our main results originates.Our paper offers new insights into the real effects of financial development and is related to two streams of literature. First, it contributes to the literature on finance and growth. Starting with Schumpeter (1911) and Robinson (1952), there has been a large literature trying to understand the relation between financial systems and economic growth. Recent theoretical work indicates two likely links between finance and growth: Bencivenga and Smith (1991) and Jappelli and Pagano (1993) argue that financial markets matter by affecting the volume of savings available to financial investments, while Greenwood and Jovanovic (1990) suggest that financial markets matter by increasing investment productivity. 1 Second, our paper contributes to the emerging literature on finance and innovation that examines various strategies for promoting innovation. Manso (2011) argues that managerial contracts that tolerate failure in the short run and reward success in the long run are best suited for motivating innovation. Also, Ferreira, Manso, and Silva (2012) show that private rather than public ownership spurs innovation. Nanda and Rhodes-Kropf (2011) suggest that "hot" rather than "cold" financial markets help promote innovation. 2 Unlike earlier studies, we use a rich cross-country data set to examine specific economic mechanisms through which finance affects innovation and document the contrasting impacts of equity market and credit market development.Our paper is distinct from, but also complementary to, a few recent studies. Using a sample of U.S. IPO firms, Bernstein (2012) finds that going public significantly reduces firms' innovation quality. While this result is important, we believe this finding depends on the existence of a well-developed equity market in the U.S.; in other words, the negative effects of public equity markets on innovation along the intensive margin (i.e., U.S. firms only in his 1 Empirical evidence linking finance and growth has shown that the size, depth, and liberalization of an economy's financial system positively affect its future growth in per capita, real income, entrepreneurship, employment, and output (e.

Subsidies, financial constraints and firm innovative activities in emerging economies

“…Brown and Petersen (2009) and Brown et al (2012) estimate dynamic panel models and confirm the linkage between stock issues and R&D investment of US and European firms, respectively. Using panel data for 32 countries, Hsu et al (2014) show that overall market capitalization encourages innovation productivity (as measured by patenting).…”

“…A large strand of literature highlights that firm innovative activities are likely to be more severely affected by financial constraints than fixed capital investment due to the higher complexity, specificity and degree of uncertainty characterising innovation projects. Studies in this literature stream have focused on the role played by internal finance (Himmelberg and Petersen 1994;Mulkay et al 2001), cost and availability of external funding (Hall 2002;Brown et al 2012) and overall country financial development (Hsu et al 2014) for R&D investment.…”

The Impact of Financing Constraints and Agency Costs on Corporate R&D Investment: Evidence from China

“…After the global financial crisis in 2008, countries around the world have more clearly recognized the importance of innovation and R&D investment Cohen 2010;Hall and Lerner 2010;Hsu et al 2012;Paunov 2012;Tongue and Allan 2013;Choi and Williams 2014;Lamperti et al 2015). Recently the "G8" group has explicitly contended that it is necessary to change the mode of economic development and countries must vigorously promote strategic economic restructuring and integrate both economic resources and new technologies, thus make the economic development relying more on the advancement of sciences and technology (Aghion et al 2012;Nunes et al 2012;Bronzini and Iachini 2014).…”

Financial reporting quality and corporate innovation

“…What drives innovation is of great interest to various stakeholders, including investors, managers, employees, suppliers, customers and regulators. There is a growing body of research that supports the critical role of highly developed financial markets in promoting innovation (e.g., Hsu, Tian, & Xu, ). Despite information and incentive problems associated with innovation (e.g., Holmstrom, ), the existing literature provides little insight into the direct relation between external financial reporting, which is a key ingredient of well‐developed financial markets, and innovation.…”

“…The results indicate that firms with higher financial reporting quality exhibit greater innovation success . To alleviate potential endogeneity concerns, I investigate the effect of financial reporting quality on three‐year‐ahead innovation (e.g., He & Tian, ), include an extensive set of control variables, use a fixed effects approach (e.g., Hsu et al., ), and employ a two‐stage least squares (2SLS) regression model in which financial reporting quality variables are instrumented. I find consistent results across different identification strategies.…”