R&D Investment and Financial Frictions

Oscar Valencia ()

No 11840, Borradores de Economia from Banco de la Republica

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.

Keywords: Moral Hazard; Endogenous Borrowing Constraints; Technological Change. (search for similar items in EconPapers)
JEL-codes: D86 O41 (search for similar items in EconPapers)
Pages: 45
Date: 2014-06-26
New Economics Papers: this item is included in nep-cta, nep-dge, nep-ino and nep-sbm
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http://www.banrep.gov.co/sites/default/files/publicaciones/archivos/be_828.pdf

Related works:
Working Paper: R&D Investment and Financial Frictions (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000094:011840

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