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The effect of credit rationing on the shape of the competition-innovation relationship

Bena, Jan (2009) The effect of credit rationing on the shape of the competition-innovation relationship. Discussion paper, 629. Financial Markets Group, London School of Economics and Political Science, London, UK.

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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.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2008 The Author
Library of Congress subject classification: H Social Sciences > HF Commerce
H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting; Fixed Investment and Inventory Studies
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets
O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O31 - Innovation and Invention: Processes and Incentives
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Departments > Finance
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 629
Date Deposited: 10 Jul 2009 11:32
URL: http://eprints.lse.ac.uk/24419/

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