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Cambridge Journal of Economics Advance Access published online on April 22, 2008
Cambridge Journal of Economics, doi:10.1093/cje/ben015
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© The Author 2008. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

Does internal finance matter for R&D? New evidence from a panel of Italian firms

Elisa Ughetto*

* Politecnico di Torino, Italy

Address for correspondence: Politecnico di Torino-DISPEA, C.so Duca degli Abruzzi 24, 10129 Torino, Italy; email: elisa.ughetto{at}lep.polito.it

This paper investigates the relationship between finance and R&D for a panel of more than 1000 Italian manufacturing firms. While Italian firms obtain a significant share of their financing from debt, the results from a unique survey show that firms use virtually no debt to finance R&D. Because Italian firms typically do not receive external equity, the obvious source of innovation financing is internal cash flow. The sensitivity of capital investment to cash flow for small and medium-large firms is estimated, testing for the presence of informational frictions in the credit market for companies performing R&D activities. A GMM method that controls for unobserved firm-specific effects and endogenous explanatory variables is used. Cash flow plays an important role in explaining capital investment, especially for small firms. Interestingly, when the measure of firms' innovative activities is considered, significant differences are found between the sub-samples of small and medium-large firms. While small innovative firms are subject to relevant financing constraints, larger companies investing in R&D have easier access to external financing.

Key Words: Capital investment • Internal equity finance • R&D

JEL classifications: O30, G30, E22

Manuscript received August 6, 2007; final version received January 17, 2008.


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