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Credit Constraints And Innovation, Jun Li

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This paper examines the effects of credit constraints on aggregate innovation when firms face heterogeneous innovation costs and have differential access to credit. Better credit access affects aggregate innovation through (i) a direct effect by facilitating firms to innovate, (ii) a market share effect by encouraging low-cost firms to expand, and (iii) a value effect that increases competition and deteriorates high-cost firms’ innovation. We first develop a structural model featuring the above three channels. We then contrast this theory with the Chinese firm-level data documenting that Chinese state-owned enterprises are less constrained but face higher innovation costs than their private …