ABSTRACT
This study investigates the effects of firms’ financial constraints on their productivity by considering firms’ ownership structure and characteristics using a manufacturing firm-level dataset from South Korea for the period 2006–2017. The System Generalized Method of Moments results indicate that foreign multinational corporations rarely experienced financial constraints on their productivity, whereas the effects of financial constraints on productivity were aggravated for domestic firms during the global financial crisis. Particularly, small, young, and unaffiliated domestic firms experienced more severe financial constraints, especially during the global financial crisis, than did large, old, and affiliated domestic firms. The results show that small, young, and unaffiliated domestic firms which invested in R&D activity were less financially constrained than those without R&D activity. Based on the Heckman two-step estimation results, financial factors significantly affected R&D investment; thus, severe financial constraints hindered optimal R&D investment, which is necessary for productivity enhancement. Therefore, financial market failure during the global financial crisis resulted in productivity polarization. Hence, policies that relax financial constraints for innovation activity, such as R&D subsidies and tax exemption incentives should be targeted to financially vulnerable firms, such as small, young, and unaffiliated domestic firms. These policies should be strengthened during a financial crisis.
Acknowledgments
I am grateful to the anonymous referee for valuable comments and suggestions.
Disclosure of potential conflicts of interest
No potential conflict of interest was reported by the author(s).
Notes
1 The Ministry of Employment and Labour of the Republic of Korea defines large enterprises in the manufacturing industry as firms with more than 300 employees. According to OECD (Citation2021), small and medium-sized enterprises (SMEs) employ fewer than 250 people. SMEs are further subdivided into micro enterprises (fewer than 10 employees), small enterprises (10 to 49 employees), and medium-sized enterprises (50 to 249 employees). Large enterprises are those which employ 250 or more people. Therefore, I used the above Ministry of Labour definition of large enterprises, which is similar to that of the OECD (Citation2021).
2 Appendix 1 explains the procedures used to estimate the TFP as suggested by Wooldridge (Citation2009).
3 This is caculated by using and liqudity ratio and leverage ratio are tranformed in percentage.
4 I used STATA to estimate the TFP using Wooldridge’s (Citation2009) suggested method. Details about the model are discussed by Wooldridge (Citation2009).