Financial Development and Innovation in Small Firms

This paper uses firm level data from a cross-section of 57 countries to study how financial development affects innovation in small firms. The analysis finds that relative to large firms in the same industry, spending on research and development by small firms is more likely and sizable in countries at higher levels of financial development. The estimates imply that among firms doing research and development in a country like Romania, which is at the 20th percentile of financial development, a 1 standard deviation decrease in firm size is associated with a decrease of 0.7 standard deviations in research and development spending. In contrast, this decrease is only 0.2 standard deviations in a country like South Africa, which is at the 80th percentile of the distribution of financial development. Small firms also report producing more innovations per unit of research and development spending than large firms, and this gap is narrower in countries at higher levels of financial development. As a robustness check, the author shows that these patterns are stronger in industries inherently more reliant on external finance.

Bibliographic Details

Main Author:	Sharma, Siddharth
Language:	English
Published:	World Bank, Washington, DC 2007-09
Subjects:	ACCESS TO FINANCE, AVERAGE INTEREST, AVERAGE INTEREST RATE, BANK DEPOSIT, BANK DEPOSITS, BANK FUNDING, BANKING SECTOR, BANKING SYSTEM, BOND, CAPITAL MARKETS, CHECKS, COLLATERAL, COMPETITORS, CORPORATE PERFORMANCE, CORPORATION, CORRELATIONS, CREDIT BANK, CREDIT CONSTRAINTS, CREDIT RELATIONSHIPS, DEBT, DEBT FINANCE, DEBT MARKETS, DEPOSIT, DEPOSIT ACCOUNTS, DERIVATIVE, DOMESTIC BANKS, DOMESTIC MARKET, DOMESTIC MARKETS, DUMMY VARIABLE, ECONOMIC GROWTH, ECONOMIES OF SCALE, EMPLOYEE, ENTRY BARRIERS, EQUIPMENT, EQUITY FINANCING, EXCLUSION, EXPENDITURE, EXTERNAL FINANCE, EXTERNAL FINANCING, EXTERNAL FUNDS, FINANCIAL CONSTRAINT, FINANCIAL DEVELOPMENT, FINANCIAL INNOVATIONS, FINANCIAL INSTITUTIONS, FINANCIAL INTERMEDIARIES, FINANCIAL INTERMEDIATION, FINANCIAL MARKET, FINANCIAL MARKETS, FINANCIAL STRUCTURE, FINANCIAL SYSTEMS, FINANCING COST, FIRM PERFORMANCE, FIRM SIZE, FIXED COST, FIXED INVESTMENT, FOREIGN BANKS, GOVERNMENT BANKS, HOLDING, INCOME LEVEL, INFORMATIONAL ASYMMETRIES, INTANGIBLE, INTANGIBLE ASSETS, INTELLECTUAL PROPERTY, INTELLECTUAL PROPERTY RIGHTS, INTEREST RATE, INTEREST RATE DATA, INTEREST RATE SPREAD, INTEREST RATE SPREADS, INTEREST RATES, INTERNAL FUNDS, INTERNATIONAL BANK, INTERNATIONAL FINANCIAL STATISTICS, INVESTING, LARGE FIRMS, LENDERS, LIQUIDITY, LIQUIDITY CONSTRAINTS, LOAN SIZE, LOW INCOME, LOW INTEREST RATE, LOWER INTEREST RATE, MARKET COMPETITION, MARKET FAILURES, MARKET INTEGRATION, MARKET LIQUIDITY, MARKET SHARE, MARKET STRUCTURE, MARKET VALUE, MORAL HAZARD, NEW BUSINESS, POLITICAL ECONOMY, POTENTIAL INVESTORS, PRIVATE CREDIT, PRIVATE EQUITY, PROBABILITY, PRODUCTIVITY, PROPERTY RIGHTS, R&D, R&D FINANCING, R&D PROJECTS, RENTS, RESEARCH WORKING PAPERS, RESEARCHERS, RETURNS, SALES, SAVINGS, SAVINGS DEPOSITS, SMALL BUSINESS, SMALL BUSINESS FINANCE, SMALL FARMS, SMALL FIRM, SMALL FIRMS, SMALL LOAN, SMALL LOANS, SMALLER FIRMS, SOURCES OF FUNDS, STOCK MARKET, STOCK MARKET CAPITALIZATION, STOCK MARKET DEVELOPMENT, STOCK MARKETS, STOCKS, SURVEY DATA, SURVEY INSTRUMENTS, TANGIBLE ASSETS, TIME DEPOSIT, TURNOVER, VENTURE CAPITAL, WAGES,
Online Access:	http://documents.worldbank.org/curated/en/2007/09/8621977/financial-development-innovation-small-firms https://hdl.handle.net/10986/7590
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