Financial constraints of innovative firms and sectoral growth

Innovation policies can consist in measures aimed at directly alleviating financial constraints of innovative firms, beyond more traditional fiscal incentives to foster private R&D spendings. To explore the interaction between innovation and financial constraints at the sector level, and evaluate stylized policy scenarios, this paper brings together two analytical frameworks from the endogenous growth and corporate finance literatures. Within this dynamic model, firms innovate and compete for products through destructive creation and accumulate internal funds in relation to financial hindrances occurring when they enter, develop or exit. Including notably asymmetric information between investors and managers of firms with respect to uncertain cash flows, this model is first consistent with the fact that firms tend to spend more on R&D when their internal funds are higher. It then allows for experiments addressing growth and overall liquidity holdings for various sectoral contexts. In this specific framework, easing access to initial funding, as fiscal incentives, can have substantial effects. Moreover, while a stylized high-tech sector is associated with higher growth and overall liquidity holdings, both variables depend to a large extent on many sectoral characteristics, such as R&D efficiency, entry costs, and cash flow mean and volatility.