Financial crises and innovation

Financial crises are accompanied by permanent drops in economic growth and output. Technological progress innovation important drivers of growth. Using cross-country panel data on patenting at the industry-level, we connect these facts show that financial have large long-lasting impacts (measured patenting) for sectors dependent external finance. This effect is driven banking crises, which both immediate long lasting — upwards 8 years. consistent with firms losing funding new projects (reducing patents long-term) needing to liquidate existing meet financing pressures near-term). compares stock market crashes, see an decline followed a compensating increase, being “shelved” redeployed later. Banking thus unique their impact innovation, providing link between them observed patterns persistently lower long-term The effects larger if crisis was preceded weak or leveraged banks. We do not observe patent quality during crises. channel operative currency but find evidence trade channel, whereby higher exporting industries increase following accompanying terms improvement.