Using Dutch data we empirically investigate how financing and innovation
vary across firm characteristics. We find that when firms face financial
constraints, debt financing and innovation choices are not independent
of firm characteristics, and R&D slows down. In the absence of financial
constraints, however, as they raise debt, firms become less inclined to
innovate and the change in the propensity to innovate no longer varies
with firm characteristics. We find that financing constraints faced,
propensity to innovate, and R&D intensity are not uniform across firm
characteristics. A new 'Control Function' estimator to account for
heterogeneity and endogeneity has been developed.
Keywords: Innovation, R&D, Capital Structure, Financial Constraints, Firm Characteristics, Correlated Random Effects, Control Function, Expected a Posteriori.
JEL Classification: G30, O30, C30