Financial Constraints on Innovation: A European Cross-Country Study

In this paper we use responses to the second Community Innovation Survey (CIS II) to investigate the relative importance of finance as a constraint to innovation in Europe and also explore differences across industries, countries and firm sizes in the importance of any finance constraints. The findings are related to theoretical propositions and existing empirical literature. It is found that financial constraints are of more importance than other internal and external factors in terms of impacts on projects not starting, being delayed or postponed. It also shown that in market based systems finance is more of a constraint than in bank based systems, and that riskier, newer industries are more constrained by finance. The results on the importance of firm size are less conclusive.

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