R&D Investment and Financial Frictions

Oscar Valencia ()

Borradores de Economia from Banco de la Republica de Colombia

Abstract: R&D intensity for small firms is high and persistent over time. At the same time, small firms are often financially constrained. This paper proposes a theoretical model that explains the coexistence of these two stylized facts. It is shown that self-financed R&D investment can distort the effort allocated to different projects in a firm. In a dynamic environment, it is optimal for the firm to invest in R&D projects despite the borrowing constraints. In addition, this paper shows that beyond a certain threshold, effort substitution between R&D and production appears. When transfers from investor to entrepreneur are large enough, R&D intensity decreases with respect to financial resources. Conditional on survival, the more innovative and financially constrained firms are, faster they grow and exhibit higher volatility.

JEL-codes: D86 O31 O41 (search for similar items in EconPapers)
Pages: 45
Date: 2014-06
New Economics Papers: this item is included in nep-com, nep-cse, nep-ino, nep-ppm, nep-sbm and nep-tid
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https://doi.org/10.32468/be.828 (application/pdf)

Related works:
Working Paper: R&D Investment and Financial Frictions (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bdr:borrec:828

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