Innovative Capability and Financing Constraints for Innovation More Money, More Innovation?

This study presents a novel empirical approach to identify nancing constraints for innovation based on the concept of an ideal test as suggested by Hall (2008). Firms were o ered a hypothetical payment and were asked to choose between alternatives of use. If they selected additional innovation projects, they must have had some unexploited investment opportunities that were not pro table using more costly external nance. We attribute constraints for innovation not only to lacking nancing, but also to rms' innovative capability. Econometric results show that nancial constraints do not depend on the availability of internal funds per se, but that they are driven by innovative capability.