Abstract
We analyze the relationship between financing constraints and firms? R&D activity using a rich and comprehensive firm-level balance sheet and income statement data set of manufacturing firms in Turkey for the period 1996 to 2013. Using a firm-specific, time-varying financing constraints index, we find that financing constraints have a negative relationship with firms? R&D activity, after controlling for other determinants of R&D such as firm size, capital intensity and export market participation.
Highlights
It is a widely-held view that the R&D activity is difficult to finance and highly susceptible to financing constraints
While a significant number of empirical studies find a negative relationship between financing constraints and R&D activity, Bronwyn Hall and Josh Lerner (2010) provide a comprehensive summary of the literature and conclude that it remains an open question whether financing constraints matter for R&D
We contribute to this empirical literature by providing an extensive empirical analysis of the link between R&D activity and financing constraints in the context of a developing economy, Turkey, for the period of 1996-2013
Summary
There is a large literature studying the effects of financial factors on firms’ investment decisions in the absence of perfect capital markets. Firing or re-hiring personnel and acquiring intangible assets require substantial expenditure and R&D activity may require continued financing Given these high sunk cost and adjustment costs, a firm may decide to start new R&D programs only if it has (and is likely to continue having) sufficient resources to pursue the R&D activities from the very beginning of the project to its end. R&D investment is usually concentrated in firm-specific assets and cannot be resold in a secondary market during times of financial distress All in all, these characteristics of R&D activity may make it subject to credit rationing by potential lenders and as a result firms may constrain their R&D activity if they do not have enough internal resources to finance it. Czarnitsky, Hottenrott, and Thorwarth (2011) look at the components of R&D and find that research investment is more sensitive to liquidity than development activity Another line of research examines the links between financing constraints, R&D and exporting strategies. As we use a different source of data, derived from firm-level balance sheets and income statements, we are able to conduct our analysis with a focus on financing constraints
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