Innovation and the Growth of Cities

Innovation and the Growth of Cities

Zoltán J. Ács

This new and original book by Zoltan Acs explores the relationship between industrial innovation and economic growth at the regional level, and reaches conclusions as to why some regions grow but others decline. While the analysis draws on industrial organization, labor economics, regional science, geography and entrepreneurship, the book focuses on innovation and the growth of cities by the use of endogenous growth theory.

Chapter 6: Capital Structure, Innovation and Firm Size

Zoltán J. Ács

Subjects: economics and finance, economics of innovation, evolutionary economics, geography, cities, innovation and technology, economics of innovation, urban and regional studies, cities


INTRODUCTION 6.1 The role of finance in promoting entrepreneurship and innovation is the subject of a large literature. One of the main questions in this literature is whether or not the financial markets are biased against entrepreneurs and small firms in the sense that small firms suffer from lack of information about and/or lack of access to financial markets. A rich theoretical literature has emerged in the last decade, flowing from the early papers of Jaffee and Russell (1976) and Stiglitz and Weiss (1981).1 Whilst the underpinnings of the notions of a ‘debt gap’ and ‘asymmetric information’ thesis have been questioned (de Meza and Webb 1987), its broad implications seem to have been accepted by policy-makers around the world. The belief that capital markets do not provide adequate funds for new business is one of the rationales for governmentassisted programs for small business (ENSR 1993; SBA 1996; Besley and Levenson 1996). In support of the debt–gap thesis are the findings of Evans and Jovanovic (1989), Blanchflower and Oswald (1996) and more recently Holtz-Eakin, Joulfaian and Rosen (1994), and Black, de Meza and Jeffreys (1996). They show that the probability of survival is a function of the individual’s assets. For example, Holtz-Eakin et al. (1994) show that a $150,000 inheritance in 1985 increases the probability that an individual will continue as a sole proprietor by 1.3 percentage points. Also, an inheritance has a substantial impact on firm growth: receipt of any surviving enterprise increases by almost 20 percent....

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