Cash is King: Financing the Innovation-Productivity Link at Firm Level

Recent models of firm level innovation have provided more insights into the process than traditional indicators of innovative activities such as R&D. Based on the three-step Crépon, Duguet and Mairesse (CDM) model, empirical studies have incorporated micro data from several national innovation surveys alongside traditional R&D and productivity measures to produce reasonable results. Despite extensive application of the CDM model to describe the innovation-productivity link, the effects of financing variations on the process have not been explored. Using micro-data on Italian firms from 2001-03 (similar to Hall et all), I find that the ability to self-finance has a strong influence on the likelihood of process innovation success, and consequently firm productivity. In addition, committing more labor, and not capital, to formal R&D networks will increase the odds of innovation success and higher productivity, contrary to prevailing thought. Lastly, I find that the effects of debtor-in-possession, management autonomy, education, trade, and customer types on the innovation-productivity link are more mixed for firms at different technology levels.