Heterogeneous effects of financial constraints on innovation: Evidence from Chile

In this paper we study the effect of financial constraints on innovation using data from a 2007 survey of more than 10,000 Chilean firms. In contrast with other surveys, this dataset allows for the construction of a direct indicator of constraints on credit for investment in innovation and sheds light on how these restrictions affect firm’s innovation outcomes heterogeneously. In our empirical approach, we deal with several econometric problems associated with the endogeneity of the credit constraint indicator and the binary nature of the innovation variable. We find that financial constraints are quantitatively important barriers for innovation in Chile. These constraints are particularly severe in the case of small firms and firms operating in the service sectors. We also find that these constraints are specific to innovation-related investments and particularly with regard to the accumulation of intangible assets.