Inderscience Publishers

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

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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

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