The demand and supply of external finance for innovative firms

Andrea Mina, Henry Lahr, Alan Hughes
Work package: 
WP 3
Publication number: 
01 August 2011

Abstract: Access to finance has figured prominently in the debate on barriers to firm growth, but existing empirical research has not found conclusive evidence of a ‘finance gap’. Moreover, it is not clear to what extent innovation worsens financial constraints and what role innovation inputs, processes and outputs play in the market for external capital. In this paper we analyse how firm-level innovation affects 1) the likelihood of seeking external finance 2) the likelihood of obtaining it and 3) the likelihood of obtaining different forms of capital. We analyse an original dataset of 3,095 UK and US firms (SMEs and middle-market) containing information on firms’ innovation behaviours, performance and finances for the period 2002-2004. Controlling for a rich set of firm-specific characteristics), we provide novel and extensive evidence on the effects of profitability, leverage, human capital, R&D expenditure, types of innovation and IP on the demand for external capital, its supply and the form of financing.

Keywords: Financial constraints; finance gap; external capital; R&D investments; innovation

JEL Codes: G32, O16, O30