Essays in Honour of Keith Cowling
Edited by Michael Waterson
Chapter 3: Financial Constraints on Innovation: A European Cross-Country Study
Alessandra Canepa and Paul Stoneman 1. INTRODUCTION If the subject of Keith Cowling’s work is to be succinctly summarised, it would be that his prime concern has been the functioning of capitalist economies and the design of policies to improve their performance. His interests have centred in particular upon European economies and European policy. This chapter sits solidly within this area of interest. Its concerns are with the performance of capital markets and such markets are at the centre of the capitalist system. The orientation of the chapter is also very European. Although policy issues are not explicitly explored, there are implications. The main aim of this chapter is to explore the impact of ﬁnancial factors upon the innovative performance of European ﬁrms. Particular issues to be addressed are the relative importance of ﬁnancial constraints versus other constraints upon innovation, and whether the importance of ﬁnancial factors varies across ﬁrm sizes, industries and countries. There has recently been extensive growth in the literature that looks at the impact of ﬁnancial factors upon the investment of ﬁrms in both ﬁxed capital and R&D (a common proxy for innovative performance). The empirical aspect to this literature largely relies upon the econometric exploration of ﬁrm or industry level panel data sets on investment and/or R&D and ﬁrm and market characteristics, with ﬁnancial factors being represented by the inclusion of a cash ﬂow variable as an indicator of potential ﬁnancial constraints. Schiantarelli (1996) and Hubbard (1998) present reviews of this literature as...
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