Does Financial Constraint Impede the Innovative Investment? Micro Evidence from China

Dongyang Zhang and Wenping Zheng

Emerging Markets Finance and Trade, 2020, vol. 56, issue 7, 1423-1446

Abstract: This study is among one of relatively few to test for financial constraints on corporate intangible investment behavior. We provide new evidence on the influence that financing constraints have on innovation investment using data of Chinese industrial firms during 1998–2006. By employing the system Generalized Method of Moments to overcome the endogeneity problem of large dynamic panel data, we find that non-state and foreign-owned firms exhibit positive and statistically significant sensitivity of innovation investment to cash flow, while state-owned enterprises (SOEs) do not. In addition, among firms with these characteristics, short-term banking finance and smoothing function of net working capital play significantly positive roles in financing innovation investment not only for SOEs but also for non-state and foreign firms. Our results are robust to a battery of sensitivity checks.

Date: 2020
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DOI: 10.1080/1540496X.2018.1542594

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