Title: The impact of financial constraints on firm R&D investments: empirical evidence from China

Authors: Enyan Yang; Guangrong Ma; James Chu

Addresses: Center for Chinese Agricultural Policy, The Institute of Geographic Sciences and Natural Resources Research, Chinese Academy of Sciences, 11A, Datun Road Chaoyang District, Beijing, 100101, China ' China Financial Policy Research Center, School of Finance, Renmin University of China, No. 59 Zhongguancun Street, Haidian District, Beijing, 100872, China ' The Freeman Spogli Institute for International Studies, Stanford University, 616 Serra St. C100, Stanford, CA 94305-6055, USA

Abstract: Innovation is essential for economic development and critical for firms to remain competitive. However, Chinese firms lag behind developed economies in terms of innovation, as measured by investments in R&D. R&D investments are more likely to be subject to financial constraints than ordinary investments as a result of higher risk and longer gestation periods. Using a unique World Bank survey of 12,400 manufacturing firms in China, this paper investigates the effects of financial constraints on firm R&D activities. We find that the access to a bank line of credit is positively and statistically significantly associated with firm R&D. We further use an exogenous shock of credit crunch caused by macroeconomic control policies in 2003-2004 to identify the effects of financial constraints on R&D. We find robust evidence that firms adversely shocked by the credit crunch reduced or even ceased R&D investments. Our findings highlight how financial constraints in fact reduce R&D investment in countries.

Keywords: financial constraints; R&D investment; credit crunch; bank finance; China; research and development; innovation; manufacturing industry.

DOI: 10.1504/IJTM.2014.060949

International Journal of Technology Management, 2014 Vol.65 No.1/2/3/4, pp.172 - 188

Received: 25 Apr 2012
Accepted: 22 May 2013
Published online: 30 Jun 2014 *

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