Date of Award

6-2014

Document Type

Open Access

Degree Name

Bachelor of Arts

Department

Economics

First Advisor

Mehmet Fuat Sener

Language

English

Keywords

finance, resources, allocation, skilled workers, economics

Abstract

Economic theory suggests that the more financially constrained a firm, the lower its ability to allocate resources for innovation. I test this theory using firm-level survey data that covers 29 Eastern European and Central Asian countries. The survey is conducted in 2002, 2005, and 2009, and covers nearly 12,000 enterprises. I construct two baseline probit models to test the impact of financial constraints on firms’ ability to innovate a new product or upgrade an existing product. Existing literature suggests that the more financially constrained a firm, the less likely they are to innovate. Previous studies have also noted the reverse causality that may exist between these two indicators. To account for this potential endogeneity problem, I run probit regressions using instrumental variable techniques. My empirical findings suggest that the greater the difficulty of access to finance, the less likely a firm is to innovate. Conversely, I find that the following measurements positively influence a firm’s innovational activity: whether or not the firm has is internationally recognized; the percent of employees with a university degree; the number of full time employees; percent of skilled workers; and, whether or not the firm’s supplies were imported directly.

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