Credit constraints and R&D over the boom and bust: Firm-level evidence from Central and Eastern Europe

•We study the effect of credit constraints on R&D activity over the boom-bust cycle.•We use comparative firm-level data from ten Central and Eastern European (CEE) countries.•Credit constraints have a strong negative effect on firms’ R&D activity in CEE.•The great recession did not aggravate the negative effect of credit constraints on R&D. This paper studies the effect of credit constraints on R&D over the recent boom and bust episode in Central and Eastern European countries (CEECs). Given that financial and venture capital markets in CEECs are thin in comparison to those in high-income economies, it is proposed that credit constraints have a significant adverse effect on R&D activity in these countries. The paper uses three waves of Business Environment and Enterprise Performance Survey (BEEPS) data between 2005 and 2013 on manufacturing firms from ten CEECs. We find that credit constraints have a substantial effect on R&D engagement, as the probability of credit constrained firms undertaking R&D activities is around 30 % lower than for other firms. The adverse effect of credit constraints for R&D emerges during the years of fast economic growth.