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Gorodnichenko, Yuriy; Schnitzer, Monika (2013): Financial constraints and innovation: Why poor countries don't catch up. In: Journal of the European Economic Association, Vol. 11, No. 5: pp. 1115-1152
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This paper examines micro-level channels through which financial development can affect such macroeconomic outcomes as level of income. Specifically, we investigate theoretically and empirically how financial constraints affect a firm’s innovation activities. Theoretical predictions are tested using unique firm survey data, which provide direct measures for innovations and firm-specific financial constraints, as well as information on shocks to firms’ internal funds that serve as firm-level instruments for financial constraints. We find unambiguous evidence that financial constraints restrain the ability of domestically owned firms to innovate and hence to catch up to the technological frontier.