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Competition, Monopoly and Corporate Governance

Essays in Honour of Keith Cowling

Edited by Michael Waterson

Competition, Monopoly and Corporate Governance covers three broad themes, each associated with a particular strand of Keith Cowling’s own writings in industrial economics and each represented by four specially commissioned papers.
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Chapter 3: Financial Constraints on Innovation: A European Cross-Country Study

Alessandra Canepa and Paul Stoneman


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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