Harhoff, Dietmar
Working Paper — Digitized Version
Are there financing constraints for R&D and
investment in German manufacturing firms?
ZEW Discussion Papers, No. 96-28
Provided in Cooperation with:
ZEW - Leibniz Centre for European Economic Research
Suggested Citation: Harhoff, Dietmar (1996) : Are there financing constraints for R&D and
investment in German manufacturing firms?, ZEW Discussion Papers, No. 96-28, Zentrum für
Europäische Wirtschaftsforschung (ZEW), Mannheim
This Version is available at:
http://hdl.handle.net/10419/29441
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Discussion Paper No. 96-28
Are There Financing Constraints
for R&D and Investment in
German Manufacturing Firms?
Dietmar
Harhoff
w
636
(96.28)
ZEW
Zentrum
fOr
Europaische
Wirtscllaftsforschung
GmbH
Centre
for
European
Economic
Research
Non-Technical Summary
The interface between financial
and
real decisions may be a source of
distortions
if
outside investors or providers of debt do not have the same information
as
the firms undertaking innovation
and
investment projects. This effect
is
well-
documented
in
theoretical models. Over the last 10 years, a large number of studies
have appeared which also provide empirical support for the notion of financing
constraints.
Previous studies
on
financing constraints
in
Germany have mostly used panel
data
on
large publicly traded firms. For these enterprises, little or no evidence has
been produced that would point to the existence of financing constraints. Conversely,
studies using survey data
on
smaller firms, but often employing no or less convincing
controls for latent heterogeneity have consistently produced evidence that such
constraints may exist. Moreover, there has been no study focusing
on
the potential
impact of financing constraints
on
R&D
expenditures of firms. This paper addresses
these issues
by
employing a sample which mostly consists of manufacturing firms
not traded
in
the German stock market. Moreover, since these firms perform R&D,
data
on
R&D expenditures can be used to study the relationship between financing
and innovation activities, and to compare the results to those from an analysis of
investment and finance.
In
a first step, I employ accelerator and error-correction model (ECM)
specifications as suggested by Bond et
al
(1997). While cash flow effects are quite
strong
in
the accelerator models, allowing for more complex adjustment mechanisms
in
the
ECM
regressions weakens their effects. However,
in
the case of R&D
expenditures significant, but relatively small effects remain for a subset of relatively
small firms.
In
the case of investment
in
physical capital, the smallest firms are again
characterized by such liquidity effects.
There are a number of problems with the interpretation of the relationship
between cash flow and investment.
In
particular, a firm that has entered into a new
and profitable market is likely to experience relatively high cash flow which may
signal further profitable investment opportunities. Thus, cash flow
is
also an indicator
of furture investment opportunities and therefore a potential determinant of
investment demand. While some of this effect may be captured
in
output growth, the
potential for endogeneity biases remains. The paper therefore develops an
alternative theoretical framework which is not susceptible to this ambiguity. Based
on
previous work by Bond and Meghir (1994), I derive an Euler equation framework with
Euler equations for investment and for
R&D.
In
this framework, the equations that
have been derived should correctly describe the investment and R&D behavior of
firms if the underlying assumptions,
in
particular the absence of any financing
constraints, hold.
However, the empirical evidence produced by the Euler
equ'ations
is
not
completely convincing. The Euler equations are closer to the expected results for
large firms (as they should if these are not financing-constrained), but fail completely
for smaller firms (which would be expected if these firms are financing-constrained).
Yet,
it
is
likely that deviations from the expected results for large firms are partly
driven by econometric and measurement problems.
Thus,
in
order to answer the question whether the liquidity effects captured
in
the accelerator and
ECM
specifications really reflect financing constraints, I also use
complementary data from
an
innovation survey.
In
this survey, firms were asked
directly whether a lack of debt or equity finance was
an
impediment for investment
and
innovation projects. These data are matched at the firm level to the sample used
here. Again, they suggest that the smaller firms
in
the matched subsample are much
more likely to indicate that financing constraints exist.
There are a number of conclusions that can be drawn from this paper. First, for a
German sample of this size and for the time period under consideration. only the
very smallest firms appear to
be
affected
by
financing constraints. This implication
holds both for investment and for R&D. If one simply uses a sample of publicly
traded companies. there should
be
little evidence of such constraints. Thus the
results are consistent with
~hose
of earlier studies of publicly traded firms (e.g. Bond
et al. 1997). but the size effects detected here are also consistent with the results
produced by studies using survey data
on
small and medium-sized firms. Finally, the
liquidity effects detected for the small firms are consistent with direct evidence from
survey questions. Thus, they appear to reflect real financial constraints, rather than
econometric artefacts.
Are There Financing Constraints for
R&D
and Investment in German
Manufacturing Firms?
Dietmar
Harhoff
Zentrum
fUr
Europaische Wirtschaftsforschung (ZEW),
University of
Mannheim
and
CEPR
This
Version:
July
1997
Abstract
Using a newly constructed
panel
dataset
of
German
enterprises,
I
estimate
R&D
and
capital
investment
equations for
the
time
period
from 1990
to 1994. Simple accelerator specifications indicate
consi~er
able sensitivity ofR&D
and
investment
to
cash
flow for relatively
small
firms. Much
of
this
effect vanishes
already
once error-correcting
behavior is
taken
into account,
but
a significant positive
relationship
between
cash
flow
and
investment
remains
for relatively
small
firms.
In
the
case of R&D,
weak
but
significant
cash
flow
persist
both
for
small
and
large
firms.
The
evidence from
Euler
equation
estimates
is
not
conclusive.
The
investment
Euler
equation for
large
firms
appears
to
perform relatively well
and
yields
results
close to those expected
under
the
null hypothesis
of
no financing
constraints.
The
estimates
from
the
Euler
equation for R&D
are
not informative. Additional evidence from
survey
data
suggests
that
the
cash flow sensitivity
of
investment
in
small firms is likely to reflect financing
constraints.
JEL
classification:
LlO,
031,
C23, G30
Keywords:
R&D,
investment,
financial constraints, firm size, credit
rationing
Acknowledgements
This
research
has
been
supported
by
grants
from
the
German
Research Council (DFG)
and
the
ZEW. I would
like
to
thank
conference
and
seminar
audiences
in
Bonn,
Strasbourg,
Konstanz,
Mannheim,
at
the
NBER
Summer
Institute,
the
Wissenschaftszentrum Berlin,
the
EEA
meeting in Istanbul,
and
a DFG workshop
in
Heidelberg for helpful comments. I
am
grateful
to
Wesley Cohen,
Christian
Dustm
ann
, Zvi Griliches,
Martin
Hellwig, Bronwyn Hall,
Olaf
Hubler, Tor
Jacob
Klette,
Jan
Pieter
Krahnen,
Dennis Mueller,
Ishaq
Nadiri,
Manfred
Neumann,
and
Lars-Hendrik
Roller for
their
helpful suggestions. Steve Bond
and
John
Van
Reenen were
particularly
supportive
in
discussing
this
work. I also acknowledge
insightful
and
detailed comments made by two anonymous referees
and
the
editor, Francois Laisney.
The
construction of
the
database
has
been competently performed
and
supported
by
Christiane
BUhler, Marc Dehoust,
Andreas
Fier,
Urs
Finger, Lydia
Irrgang,
Oliver Schmale,
and
Julia
Wienbeck. All
remaining
errors
are
my responsibility.