The impact of financial markets on innovation

This thesis focuses on the impact of financial markets on innovation. On the one hand, this includes the analysis of the sensitivity of innovative firms to restrictions in external financing. On the other hand, the reaction of innovation activities to changes in the supply of external financing is investigated. In that respect, in particular the lack of access to and supply of bank financing in the recent financial crisis is being used as source of underinvestment in innovation. The second chapter of this thesis questions how firms with different combinations of innovator status and usage of external financing adjusted their investment in the financial crisis. The results in Chapter 2 indicate that innovative firms clearly suffered from the financial crisis and invested less in capital goods as a result. The third chapter of the thesis investigates the impact of external financing constraints on the innovation expenditures of firms. Thus, the degree of reliance of a firm's main bank on the interbank market for loan refinancing purposes is used to identify a firm's restrictions for obtaining external means of funding. First, the results in Chapter 3 show that innovation expenses and its components are affected negatively by external financing constraints of firms. Additionally, the results in Chapter 3 show that R&D and marketing expenditures are negatively affected by the external financing constraints of firms. This hints at a reaction of marketing expenditures to external financing constraints. Chapter four of the thesis exploits the bank credit supply channel to use it as a determinant of a firm’s innovation behavior in the financial crisis. The empirical results of Chapter 4 show that the negative credit supply shock of the financial crisis largely affected the innovation behavior of firms. In that respect the chapter shows that firms adjusted their innovation activities in 2009 dependent on the credit supply during the financial crisis. On the opposite side, the results in Chapter 4 imply that firms tended not to adjust their innovation strategy to cope with the crisis. The empirical analysis in Chapter five determines the impact of firm financing constraints (measured by a credit rating index) on R&D by accounting for the stress on financial markets and resulting constraints from the firm’s main bank. The results of Chapter 5 indicate that firms were indeed reacting more sensitively to financing constraints during the financial crisis. However, the effect is not persistent in the period right after. Furthermore, Chapter 5 determines that firm financing constraints are indeed more prevalent when the firm is associated with a bank which has larger problems in maintaining its credit supply in such a crisis (i.e. with a low capitalized bank). Moreover, the results of Chapter 5 show that receiving a subsidy does not strongly affect the impact of constraints when controlling for the receipt of subsidies. However the subsidy itself affected the R&D expenditures of firms positively in the crisis period. A second set of tests imply that subsidies mitigate the financing constraints of firms and banks. Thus, firms which received a subsidy show no enhanced sensitivity to financing constraints of firms and banks in the financial crisis period