Citation

Discussion Paper Details

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Title: Financial constraints and innovation: Why poor countries don't catch up

Author(s): Yuriy Gorodnichenko and Monika Schnitzer

Publication Date: February 2010

Keyword(s): BEEPS, export, financial constraint, innovation, productivity and technology frontier

Programme Area(s): Development Economics, Industrial Organization, International Macroeconomics and International Trade and Regional Economics

Abstract: This paper examines micro-level channels of how financial development can affect macroeconomic outcomes such as the level of income and export intensity. Specifically, the paper investigates theoretically and empirically how financial constraints affect a firm's innovation and export activities. Theoretical predictions are tested using unique firm survey data which provides direct measures for innovations and firm-specific financial constraints and information on shocks to firms' internal funds that can serve as firm-level instruments for financial constraints. There is unambiguous evidence that financial constraints strongly adversely affect the ability of domestically owned firms to innovate and to export and hence to catch up to the technological frontiers. Furthermore, the negative effect of financial constraints on productivity is amplified as these constraints force export and innovation activities to become substitutes even when these activities are natural complements. Findings reported in the paper can help explain why poor countries don't catch up, despite increasing globalization.

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Bibliographic Reference

Gorodnichenko, Y and Schnitzer, M. 2010. 'Financial constraints and innovation: Why poor countries don't catch up'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7721