Financial Constraints and innovation investment in Latin America: Evidence from Argentina, Chile and Uruguay
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In this paper, we study the effect of financing constraints on innovation and R&D investment in three Latin American countries (namely Argentina, Uruguay and Chile) using Innovation surveys covering firms both in manufacturing and services sectors. We investigate how much of innovation investment is being limited by financial obstacles. There is a large literature documenting the effects of financial constraints on R&D expenditures by firms in OECD countries (Himmelberg and Petersen, 1994; Mulkay et al, 2001; Bond et al., 2006; see Hall (2002) and Hall and Lerner (2009), for a review). Yet the evidence on the relationship between innovation and access to finance is lacking for developing countries, and notably for Latin American firms. The information available from innovation surveys points to lack of financing as one of the major barrier for innovation in Latin American firms (Navarro et al, 2010; Anllo and Suarez, 2009). Financial restrictions for innovation are an important constraint for firms to catch up and develop technological and economic advantages, and more generally, they are an important handicap for countries to improve economic development (IADB, 2010). This investigation therefore contributes to the literature in several dimensions. We provide first evidence on lack of innovation investment that is due to financial restrictions for three countries in Latin America. In addition, given that these surveys include most of industries and firms size, we explore heterogeneities across these two dimensions. It has been repeatedly argued that financial constraints are particularly more accentuated for small and medium size firms (SMEs) which are less able to provide collaterals against their loans. Further, as shown by Gorodnichenko and Schnitzer (2010), financial restrictions are more onerous for services than for manufacturing. It is less easy for firms in services to provide warranties to borrowers as their economic advantages rely more on intangible assets such as loyalty of customers and customer base) and as a result, they often face higher costs of external finance than the rest of industries.