VoxEU Column Productivity and Innovation

Mind the financing gap: Enhancing the contribution of intangible assets to productivity

Intangible assets are at the heart of firms’ competitiveness, but financing them is complex for many firms. This column examines the extent to which financing barriers affect productivity outcomes in intangible-intensive sectors, using sector- and firm-level data. The authors demonstrate the existence of a ‘financing gap’ which depresses aggregate productivity growth and resilience, and propose a set of policy options to make each source of external finance – government support, equity financing, and bank credit – more supportive of intangible investment.

Intangible assets are widely considered a major source of growth and resilience, also in view of their complementarity with digital technologies (Corrado et al. 2017). Yet, despite their aggregate rise in the past decades, productivity growth has been mediocre in most advanced economies (Haskel and Westlake 2018). This raises questions about whether barriers to the financing of intangibles is preventing their growth potential from being fully exploited.

Typically, intangible assets have unique characteristics – uncertain returns, non-rivalry, large synergies, low redeployability – that tend to increase information asymmetries and render them difficult to collateralise (Cecchetti and Schoenholtz 2018). This makes their financing complex – particularly for young and small firms –and intangible investment often falls short of desired levels for a large portion of the corporate sector. 

Our paper (Demmou and Franco 2021) extends recent OECD analyses exploring the extent to which financing barriers affect productivity outcomes in intangible-intensive sectors, and proposes a cross-cutting set of financial market reforms to unlock the potential of intangible assets.

Our results show that easing financing restrictions is particularly beneficial for productivity in sectors that rely more intensively on intangible assets (Demmou et al. 2019), indirectly confirming the existence of a ‘financing gap’ due to financial frictions. This aggregate productivity impact operates via two channels:

  • The within-firm channel operates via the ability of firms to finance their innovative projects. We show that the productivity of firms in intangible-intensive sectors benefits relatively more from sound financial conditions (Demmou et al. 2020): financing frictions explain 14% of the variation in productivity across firms in intangible-intensive sectors, against ‘only’ 11% in traditional ones (Figure 1, Panel A). 
  • The between-firm channel pertains to the reallocation of scarce resources to underpin the growth of productive firms. We provide evidence that the virtuous impact of financial development on labour reallocation across firms is larger in intangible-intensive sectors (Demmou and Franco 2021): moving from a low to a high financial development level could increase the efficiency of labour reallocation – as proxied by the sensitivity of firm-level employment growth to lagged productivity - by 60% in intangible-intensive sectors and by 40% in traditional ones (Figure 1, Panel B).

Figure 1 A financing gap hindering productivity in intangible-intensive sectors


Note: Panel A shows the portion of the variation in productivity explained by moving from a high (75th percentile in the distribution of firms’ financial constraints) to a low (25th percentile) level of financial constraints. Panel B presents the marginal effect of productivity on employment growth at different levels of financial development in both high (dark blue line) and low (light blue line) intangible-intensive sectors.
Source: Demmou et al. (2020), Demmou and Franco (2021).

New challenges and opportunities related to the COVID-19 outbreak 

The COVID-19 outbreak generates new opportunities to harness intangible assets potential, but also increases the challenges related to their financing. 

Using a simple accounting simulation model, we show that intangible-intensive firms tend to be more resilient to shocks like the COVID-19 (Figure 2). We conjecture two main reasons for this finding. First, consistent with the diverse ability to rely on innovative technologies, firms operating in intangible-intensive sectors may find it easier to adapt to the new social distancing norms that are likely to prevail in the short to medium term (Pierri and Timmer 2020) and facilitate the reorganisation of supply chains that have been disrupted by the crisis. Second, intangible-intensive firms tend to rely prevalently on internal funds to finance investment and thus to hold larger cash and equity buffers. As a result, they have a lower probability of becoming distressed during the COVID-19 crisis.

Yet, the same factors at the heart of this resilience could become a source of difficulties during the recovery, slowing down intangible-investment in the aftermath of the crisis. As intangible-intensive firms are using their cash reserves to cover operating expenses during the crisis and find it difficult to access external finance, they may have to reduce critical investments until they buffer again enough financial resources. This process might take time given the reduced profit streams and uncertainty around future sales. A number of theoretical and empirical studies corroborate this narrative. For instance, when faced with financial constraints, firms cut their investment in R&D to reduce liquidity risks (Aghion et al. 2010, Aghion et al. 2012) and, more broadly, invest less in intangibles (Garcia-Macia 2017), especially if they are young and small (Brown et al. 2009, Hall and Lerner 2010).

Figure 2 The impact of COVID-19 along the intangible intensity dimension


Note: Based on the accounting framework developed in Demmou et al. (2021), the figure shows the predicted impact of the COVID-19 outbreak one year after the implementation of the first confinement measures on both high and low intangible-intensive sectors. Panel A reports the percentage of otherwise viable firms experiencing losses, while Panel B the percentage of otherwise viable distressed firms (i.e. firms whose book value of equity is predicted to turn negative). The ‘optimistic scenario’ foresees a sharp drop in activity lasting two months, followed by a progressive but not complete recovery in the remaining part of the year; the ‘pessimistic’ scenario initially overlaps with the ‘upside’ scenario, but then has a slower recovery due to more widespread further outbreaks of the virus accompanied by stricter mobility restrictions. 
Source: Demmou and Franco (2021).

Policies to close intangibles’ financing gap

The financial system has been historically designed to ease the accumulation of tangible capital and thus the global shift of our economies toward ideas-based growth reduces the ability of the financial sector to serve firms’ needs, generating new challenges for policymakers.1

Given differences in the structure of financial systems across countries as well as in the most appropriate financing source for the various types of intangibles, the best-suited answer is not a one-size-fits-all approach. Accordingly, we discuss policy-levers that authorities could exploit to make each source of external finance available to firms - government support, equity financing, and bank credit - more supportive of intangible investment (Figure 3). 

The following set of policy measures are particularly relevant:

  • Financial market framework policies. Equity investors are more willing than banks to take risks even without strong collateral. Several actions could spur both the demand and supply of equity: progressing on the European Capital Market Union, reducing the preference to use debt over equity, easing access to Initial Public Offerings, ensuring that the structure of equity markets is supportive of the provision of patient and engaged capital, and enhancing financial literacy.
  • Standard innovation policies that would benefit investment in intangibles. The development of venture capital markets, which are an important source of finance for start-ups and intangible-intensive firms at early stages of their life cycle, and a fine-tuning of government direct and indirect support of high growth SMEs could further ease the financing frictions faced by innovative firms.
  • Policies to widen financing options for investment in intangibles. Ensuring efficient liquidation of intangibles and providing incentives to bank credit backed by intangibles could increase their collateral value and ease access to bank finance. Better tailoring financial reports and accounting standards to the specific features of intangibles would enable both banks and equity investors to make better informed decisions when allocating resources. Moreover, the expansion of well-designed R&D tax incentives and government funding to other types of intangibles might also be considered for assets displaying positive externalities (e.g. organisational capital and workers’ training).
  • Intangible-friendly COVID-19 related support. The provision of loans and loan guarantees, the development of schemes featuring equity-type capital injections, and the preservation of direct public support to innovative businesses could contribute to attenuate the disruptions caused by the COVID-19 outbreak and ease the even higher frictions that would hamper intangibles investment.

Figure 3 Policy options to ease intangibles financing



Aghion, P, G M Angeletos, A Banerjee and K Manova (2010), “Volatility and growth: Credit constraints and the composition of investment”, Journal of Monetary Economics 57(3): 246–265.

Aghion, P, P Askenazy, N Berman, G Cette and L Eymard (2012), “Credit constraints and the cyclicality of R&D investment: Evidence from France”, Journal of the European Economic Association 10(5): 1001–1024.

Brown, J R, S M Fazzari and B C Petersen (2009), “Financing innovation and growth: cash flow, external equity, and the 1990s R&D boom”, Journal of Finance 64(1): 151–185.

Cecchetti, S, and K L Schoenholtz (2017), “Financing intangible capital”,, 22 February.

Corrado, C, J Haskel and C Jona-Lasinio (2017), “Knowledge spillovers, ICT and productivity growth”, Oxford Bulletin of Economics and Statistics 79(4): 592-618.

Dell'Ariccia, G, D Kadyrzhanova, C Minoiu and L Ratnovski (2017), "Bank lending in the knowledge economy", IMF Working Papers No. 17/234.

Demmou L, S Calligaris, G Franco, D Dlugosch, M Adalet McGowan and S Sakha, (2021), “Insolvency and debt overhang following the COVID-19 outbreak: Assessment of risks and policy responses”, OECD Economics Department Working Papers No. 1651.

Demmou, L and G Franco (2021), “Mind the financing gap: Enhancing the contribution of intangible assets to productivity”, OECD Economics Department Working Papers No. 1681.

Demmou, L, G Franco and I Stefanescu (2020), “Productivity and finance: The intangible assets channel - a firm level analysis”, OECD Economics Department Working Papers No. 1596.

Demmou, L, I Stefanescu and A Arquié (2019), “Productivity growth and finance: The role of intangible assets - a sector level analysis”, OECD Economics Department Working Papers No. 1547.

Garcia-Macia, D (2017), “The Financing of ideas and the Great Deviation”, IMF Working Paper No. 17/176.

Hall, B H and J Lerner (2010), “The financing of R&D and innovation”, Handbook of the Economics of Innovation, 1: 609–639.

Haskel, J, and S Westlake (2018), “Productivity and secular stagnation in the intangible economy”,, 31 May.

Pierri, N, and Y Timmer (2020), “IT shields: Technology adoption and economic resilience during the COVID-19 pandemic”, IMF Working Paper No. 20/208.


1 For instance, recent evidence suggests that the rise in intangibles can explain up to 20% of bank portfolio reallocation from commercial to residential lending over the last four decades (Dell’Ariccia et al. 2017).

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