The Demand and Supply of External Finance for Innovative Firms

Abstract

Access to finance has figured prominently in the debate on barriers to firm growth, even though existing empirical research has not found conclusive evidence of a "finance gap." Moreover, it is not clear to what extent innovation aggravates financial constraints and what role innovation inputs, processes and outputs play in the market for external capital. In this article, we analyze how firm-level innovation affects (i) the likelihood of seeking external finance and (ii) the likelihood of obtaining it. We analyze an original data set of 3095 UK and US firms (small and medium size enterprises and middle-market) containing information on firms' innovation behaviors, performance, and finances for the period 2002--2004. Controlling for firm-specific characteristics, we provide novel and extensive evidence on the links between innovation, in its input, process and output dimensions, and the demand for external capital and its supply. Copyright 2013 The Author 2013. Published by Oxford University Press on behalf of Associazione ICC., Oxford University Press.