3/2015 Kadri Männasoo and Jaanika Meriküll. The impact of firm financing constraints on R&D over the business cycle

Working Paper Series 3/2015

This paper studies financing constraints on R&D over the most recent boom and bust episode in Central and Eastern Europe (CEE). Given that financial and venture capital markets in CEE are thin in comparison to those in high-income economies and that many of CEE countries experienced a credit crunch during the last recession, it is proposed that financing constraints have a significant adverse effect on R&D activity in these countries. The paper uses two complementary firm-level data-sources from ten CEE countries. We find that financing constraints have a substantial effect on R&D expenditures, as the probability of credit constrained firms undertaking R&D activities is around 70% lower than for other firms and firms’ R&D expenditure sensitivity to cash flow is very high. Despite the severity of the crisis, the adverse effect of financing constraints for R&D did not increase during the financial crisis. We also find that, conditional on credit constraints, firms’ R&D activity is higher during a recession.

JEL Codes: O16, O32, O52, E32, P23

DOI: 10.23656/25045520/32015/0015

Keywords: R&D financing constraints, credit constraints, business cycle, Central and Eastern Europe

Corresponding author's e-mail address: jaanika.merikyll [at] eestipank.ee

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The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank and the Eurosystem.