CFCM 15/11: Subsidies, Financial Constraints and Firm Innovative Activities in Developing Economies

Summary

Firm innovation is an important driver of productivity, competitiveness and economic growth. Funding private research is however a delicate aspect of the innovative process, as evidenced by two strands of literature. One strand focuses on the role played by the innovative firms' access to private funding, ie. firms' internal finance, cost and availability of external funding and overall country financial development. The other strand investigates whether public subsidies have incremental effects on firm research or whether they merely crowd out private funding.

In this Nottingham School of Economics working paper, Simona Mateut bridges the two strands of literature by focusing on whether subsidies have enhancing effects on firm innovation while controlling for firm financial strength. Relative to the public subsidies literature, another contribution of the paper is its focus on less developed economies, where financing constraints are likely to be more binding. In the study, firm innovation broadly encompasses the introduction of new products/services and the upgrading an existing product line/service, the latter being of great relevance for domestic firms in developing countries. Several alternative indicators gauge firm financial strength: objective measures of internal financial resources, access to and use of external funding, as well as responses regarding the difficulty of access to external finance. Resorting to a variety of sophisticated econometric techniques, the analysis suggests a positive relationship between firm innovation and receipt of subsidies, and the link seems stronger for financially constrained firms. Therefore, in emerging economies, public subsidies appear as an effective means to overcome the constraints the unavailability of external finance, typically exacerbated by less developed financial markets, imposes on firm innovation.

CFCM Discussion Paper 15/11, Subsidies, financial constraints and firm innovative activities in developing economies by Simona Mateut

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Authors

Simona Mateut

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