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Financial Constraints, Innovation Quality, and Growth

November 26, 2020

Kuala Lumpur Research Seminar Series

  • This paper investigates the role of financial constraints in shaping innovation quality and firm-growth dynamics through heterogeneous innovation. I build a unique data-set combining patent activities with the operating data of private Chinese manufacturing firms and show a strong negative relationship between the severity of financial constraints and a) firm growth, b) innovation intensity, and c) innovation quality. Based on these empirical regularities, I build a tractable endogenous growth model in which a multi-product firm invests in heterogeneous innovation in the face of imperfect financial markets. Tighter financial constraints cause firms to undertake more low-quality innovation, which yields temporary payoffs but no longer-term productivity improvements. This lowers firm and aggregate growth rates. The quantitative model suggests financial frictions reduce incumbents' R&D investment by 19.94% on average and slows aggregate annual productivity growth by 10.2 percent (0.4 percentage point annually).

  • Yu is an Economist and her research interests span the areas of macroeconomics, innovation, and economic growth. Her ongoing projects study the dynamic effects of financial and information frictions in firms¡¯ innovation and investment decisions.  Yu holds a Ph.D. in Economics from the University of Southern California (2020) and an M.A. in Economics from Duke University (2014).

DETAILS

  • WHEN (KUALA LUMPUR TIME): Thursday, November 26, 2020: 9:00 -10:00am
  • WHEN (ET/WASHINGTON, D.C. TIME): Wednesday, November 25, 2020: 8:00 ¨C 9:00pm
  • WATCH: WATCH RECORDING