Financial constraints and innovation: why poor countries don't catch up
01 Oct 2013-Journal of the European Economic Association (John Wiley & Sons, Ltd)-Vol. 11, Iss: 5, pp 1115-1152
TL;DR: In this paper, the authors examine micro-level channels of how financial development can affect macroeconomic outcomes like the level of income and export intensity, and investigate theoretically and empirically how financial constraints affect a firm's innovation and export activities, using unique firm survey data.
Abstract: We examine micro-level channels of how financial development can affect macroeconomic outcomes like the level of income and export intensity. We investigate theoretically and empirically how financial constraints affect a firm's innovation and export activities, using unique firm survey data which provides direct measures for innovations and firm-specific financial constraints. We find that financial constraints restraint heability of domestically owned firms to innovate and export and hence to catch up to the technological frontiers. This negative effect is amplified as financial constraints force export and innovation activities to become substitutes although they are generally natural complements.
Figures (8)
Figure 1: Measurement of financial constraints. 
Figure 2: Financial constraints and macroeconomic outcomes. 
Table 3. Differences in financial constraints between foreign and domestic private firms. 
Table 2. Differences in productivity between foreign and domestic private firms. 
Table 5. Baseline results: Export. 
Table 1. The link between productivity and innovations. 
Figure 3: Innovation, export and economic growth. 
Figure 4: Financial constraints and reforms in financial and banking sectors.
Citations
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TL;DR: This paper found that only half of the difference in labor productivity between firms and countries could be explained by differential inputs, such as capital intensity, and that the productivity differences across firms and plants are temporary but persist over time.
Abstract: Economists have long puzzled over the astounding differences in productivity between firms and countries. For example, looking at disaggregated data on U.S. manufacturing industries, Syverson (2004a) found that plants at the 90th percentile produced four times as much as the plant in the 10th percentile on a per-employee basis. Only half of this difference in labor productivity could be accounted for by differential inputs, such as capital intensity. Syverson looked at industries defined at the four-digit level in the Standard Industrial Classification (SIC) system (now the North American Industry Classification System or NAICS) like 'Bakeries and Tortilla Manufacturing' or 'Plastics Product Manufacturing.' Foster, Haltiwanger, and Syverson (2008) show large differences in total factor productivity even within very homogeneous goods industries such as boxes and block ice. Some of these productivity differences across firms and plants are temporary, but in large part they persist over time. At the country level, Hall and Jones (1999) and Jones and Romer (2009) show how the stark differences in productivity across countries account for a substantial fraction of the differences in average per capita income. Both at the plant level and at the national level, differences in productivity are typically calculated as a residual-that is, productivity is inferred as the gap between output and inputs that cannot be accounted for by conventionally measured inputs.
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Posted Content•
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TL;DR: In this article, a growth model that is consistent with salient features of the Chinese growth experience since 1992 is presented, which includes high output growth, sustained returns on capital investments, extensive reallocation within the manufacturing sector, falling labor share and accumulation of a large foreign surplus.
Abstract: This paper constructs a growth model that is consistent with salient features of the Chinese growth experience since 1992: high output growth, sustained returns on capital investments, extensive reallocation within the manufacturing sector, falling labor share and accumulation of a large foreign surplus. The theory makes only minimal deviations from a neoclassical growth model. Its building blocks are financial imperfections and reallocation among firms with heterogeneous productivity. Some firms use more productive technologies than others, but low-productivity firms survive because of better access to credit markets. Due to the financial imperfections, high-productivity firms - which are run by entrepreneurs - must be financed out of internal savings. If these savings are sufficiently large, the high-productivity sector outgrows the low-productivity sector, and attracts an increasing employment share. During the transition, low wage growth sustains the return to capital. The downsizing of the financially integrated sector forces a growing share of domestic savings to be invested in foreign assets, generating a foreign surplus. We test some auxiliary implications of the theory and find robust empirical support.
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TL;DR: In this article, the authors evaluate the effects of privatization in the post-communist economies and China and find that privatization to foreign owners results in a rapid improvement in performance of firms, while performance effects of privatizing to domestic owners are less impressive and vary across regions, coinciding with differences in policies and institutional development.
Abstract: The paper evaluates the effects of privatization in the post-communist economies and China. In post-communist economies privatization to foreign owners results in a rapid improvement in performance of firms, while performance effects of privatization to domestic owners are less impressive and vary across regions, coinciding with differences in policies and institutional development. In China relatively more estimates suggest that privatization to domestic owners improves the level of performance. Concentrated private ownership has a stronger positive effect on performance than dispersed ownership in the post-communist economies, but foreign joint ventures rather than wholly owned foreign firms have a positive effect in China. Worker or collective ownership does not have a negative effect. In the post-communist economies new firms are equally or more efficient than firms privatized to domestic owners, and foreign start-ups are more efficient than domestic ones. Privatization is not associated with lower employment. When accompanied by complementary reforms, privatization has a positive effect on economic growth. Three factors appear to drive the more positive effect of privatization to foreign than domestic owners. Domestic managers have more limited skills and access to world markets, domestically privatized firms have been more subject to tunneling and in some countries new large shareholders artificially decreased performance. The important policy implication is that privatization per se does not guarantee improved performance, at least not in the short- to medium-run. Type of private ownership, corporate governance, access to know-how and markets, and the legal and institutional system matter for firm performance.
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"Financial constraints and innovatio..." refers background in this paper
...Importantly, causation may flow from export status to productivity (Grossman and Helpman (1991), World Bank (1991), World Bank (1993), Van Biesebroeck (2005), and De Loecker (2007) for theoretical arguments and empirical evidence)....
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Abstract: C A P I T A L IS M and socialism are generally taken to be irreconcilable opposites, and the conflict between their adherents has seemed so intense as to threaten the survival of the human species. In practice, no doubt, all sorts of compromises, accommodations and mixtures of the two are possible, but conceptually, considered as blueprints for the organization of society, capitalist and socialist ownership of the means of production appear mutually exclysive. I shall argue that this is by no means the case-that capitalism and socialism are, in fact, conceptually quite compatible; that a society be at the same time capitalist and socialist (by that I do not refer to a 'mixed economy') involves no contradiction. For it turns out, on closer examination than the matter usually receives, that capitalism and socialism are features of different parts of the social structure, and are therefore not necessarily in competition or conflict with one another-at least, not conceptually (whether they could in practice coexist with one another is a different and empirical question, which is raised by, for example, 'functionalist' theories of social structure'). In brief, while capitalism is a feature of society's economic organization, socialism is rather an aspect of its political system. In fact, as we shall see, socialism is a part of political democracy, and any democratic political system is therefore necessarily socialist.
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"Financial constraints and innovatio..." refers result in this paper
...First, larger firms are more to likely to report innovations than smaller firms, which is consistent with the finding in the vast majority of studies on innovation (see e.g., Becheikh et al. (2006)) and the Schumpeter (1943) hypothesis....
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TL;DR: In this article, the authors empirically examined how ties between a firm and its creditors affect the availability and cost of funds to the firm and found that the primary benefit of building close ties with an institutional creditor is that the availability of financing increases.
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