Financial constraints in R&D investment: Firm, industry and macroeconomic determinants

This paper examines the determinants of a firm being financially constrained to implement R&D projects. We postulate that financial constraints may be explained by characteristics of the firm, by industry specific factors and by the macroeconomic conditions common to all firms. We test the hypotheses with panel data from Spanish manufacturing firms in the period 1998-2011. This time period includes years of economic expansion after Spain joined the Euro, followed, since 2008, by a severe economic and financial crisis. Controlling for firm and industry characteristics, we find that the probability of being constrained to pursue R&D has nothing to do with the counter cyclical nature of R&D Investment. However, it responds very well to the Hyman Minsky theories on the relationship between the business and the financial cycle, i.e, the Financial Instability Hypothesis. During the period of economic boom and a massive private debt accumulation process the probability of not finding funding for R&D was higher with respect to the last year of this expansion cycle, 2007. The recent general de-leveraging of non financial firms and banks’ restructuring appear to tighten the funds available for R&D too.

There are three main contributions to the literature. First, it explains the probability that a firm is financially constrained in its R&D projects, conditioned on the fact that the firms that perform R&D activities are not a random sample of the population of firms. Therefore we control for a possible sample selection bias that would appear if we would have just explained whether a firm is financially constrained or not. Second, we examine the determinants of the probability of being financially constrained using a pool of data for firms over a period of time that goes from 1998 to 2011; moreover, the firms in the sample are representative of the population of manufacturing firms in Spain. We can then examine with the same data base determinants of being financially constrained that vary across firms and over time. Third, we pay special attention to the determinants of financial constraints having to do with the macroeconomic conditions of the Spanish economy.