Do financial constraints hold back innovation and growth?: Evidence on the role of public policy

Building on a 1998 study by Rajan and Zingales, this paperexamines the impact of both general and government financial support on privateR&D rates and on firm expansion.A description of the theoreticalbackground for this research is provided with an emphasis on the subsidizationof small- and medium-sized enterprises. A survey was administered to for-profit, non-financial, and non-farmcorporations in Finland by the Research Institute of the Finnish Economy(ETLA).The descriptions of the various measures utilized in the study areprovided.Also provided is a description of the results of the dataanalysis, including the economic significance of the findings and therobustness of the tests. The findings indicate that industries that are dependent on externalfinancing are aided at rates disproportionate to other industryfirms.Firms that depend more heavily on external financing tend to investin more R&D and are more growth oriented when more government funding isavailable.(AKP)

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