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Do Financial Constraints Threat The Innovation Process? Evidence From Portuguese Firms

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Executive Summary

This paper investigates the extent to which R&D investment and innovation are financially constrained. For that purpose, the authors resort to the estimation of a selection model of R&D investment, a simultaneous equations probit model of innovation and constraints and cash to cash-flow sensitivities upon an unique and newly assembled dataset that comprises information on firms' characteristics, balance sheet information and data on firms' innovation activity. Their findings suggest that firms that do not invest in R&D and those that do not receive public funding are financially constrained. Finally, controlling for endogeneity, financial constraints severely reduce the amounts invested in R&D and seriously hamper innovation.

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