Foreign capital, credit constraints and continuity of firms’ R&D

ABSTRACT

In this article, we investigate the role of foreign capital participation as a means for firms to overcome the obstacle posed by credit constraints to sustain R&D investments. Using data for Spanish manufacturing firms in the period 1990–2006, we show that firms with foreign capital are significantly less likely to stop already initiated R&D projects and also more likely to sustain R&D investment when facing credit constraints. Our results are robust to positive selection into foreign capital participation, which we control through a set of variables chosen from a propensity score estimation, and to firms’ fixed-effects.

KEYWORDS:

• Foreign capital
• credit constraints
• R&D
• interruptions in R&D

JEL Classification:

• C10
• L60
• O30

Notes

¹ Starting from the Dorfman–Steiner relationship, Beneito et al. (forthcoming) regress available data on firms’ advertising-to-sales ratios on a set of variables capturing the own-price elasticity of demand, and take what remains unexplained in the regression (the residual) as a proxy for the cross-elasticity of demand (their measure of product substitutability).

² The variables used to estimate the p-score render positive and significant effects on the probability of foreign ownership. We also included these variables directly in the main estimation equations, rendering again positive and significant effects in all the cases, thus confirming positive selection. The rest of estimated coefficients remained unaltered.

Additional information

Funding

We gratefully acknowledge the financial support by the Spanish Ministerio de Economia y Competitividad [research grant ECO2014-55745-R]; Fundación-BBVA [Programa de Ayudas a Proyectos de Investigación en Socioeconomía, 2014]; and from the Generalitat Valenciana [PROMETEOII/2014/054].