The Effect of Credit Rationing on the Shape of the Competition-Innovation Relationship

Jan Bena

FMG Discussion Papers from Financial Markets Group

Abstract: Using a dynamic model of a step-by-step innovation race between financially constrained firms, I study how financial constraints affect innovation activity. The novel theoretical results derive from an analysis of the interaction between the incentive effect of competition on innovation and the effect competition has on the degree of credit rationing. I find that the negative effect of financial constraints on firm- and aggregate-level R&D investment is most pronounced at both high and low levels of competition. These predictions are supported by empirical evidence: The competition-innovation relationship has an inverted-U shape in less financially developed systems relative to the benchmark pattern observed in countries with highly developed financial systems. Innovation-enhancing policies implemented through competition reforms ought to be complemented by promoting financial development.

New Economics Papers: this item is included in nep-com, nep-ino, nep-knm, nep-mic and nep-tid
Date: 2009-03

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Working Paper: The Effect of Credit Rationing on the Shape of the Competition-Innovation Relationship (2008)
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