1. HOW TO FINANCE INNOVATION PERSISTENTLY? A PANEL DATA STUDY ON EXPORTING FIRMS IN SWEDEN WRSA204 02 19 1 Hans Lööf and Pardis Nabavi Centre of Excellence for Science and Innovation Studies Royal Institutes of Technology, Stockholm

2. RESEARCH QUESTION Our primary interest how a firm's innovative activity across the business cycle varies with capital structure, export frequency and geographical location. 2

3. WHY IS THIS IMPORTANT While the literature on innovative activity shows the advantages with innovation as persistent and stable activity, firms’ access to finance is typically volatile and highly affected by both cash-flow and supply of equity. 3

4. FORCES BEHIND HETROGENEITY Aghion et al. 2008 Financial problems gives rise to the pro-cyclical pattern in innovative investments by constrained firms, whereas innovation follows a Schumpeterian cycle among non-constrained firms. Thus, the non-constrained firms can innovate in recessions and increase their competitiveness against other firms. 4

5. EMPIRICAL APPROACH We test financial constraints among the exporting firms by adopting the pecking order approach (Fazzari et al. 1988) behind innovation-cash flow sensitivity. We use patent application as a proxy for innovation activity. Historically both patent filings as well as R&D have moved in parallel with the development of GDP, (OECD 2009, Griliches 1995). Prediction: Only financial constrained firms are sensitive to variation in cash flow 5

6. CONTRIBUTION 1 Innovation have intrinsic properties that make it difficult to finance externally (Arrow 1962, Hall 2002, Hall and Lerner 2010), Empirical documentation on financial constraints among innovative firms constitutes still a very limited literature (Brown and Petersen, 2009). This is particularly true for small firms. In our study, the median firm has than 30 employees and the mean is around 100. 6

7. CONTRIBUTION 2-3 Only recently economist have started to investigate the links between credit constraints and -exports (Wagner 2013), -geographical location (Bae et al. 2008), Almazan et al. 2010, Gao et 2011), 7

8. 8 INITIAL INSPECTION: 8,051 UNIQUE FIRMS AND ABOUT 50,000 APPLICATIONS

9. All exporting firms.Only persistent exporters 9 RESEARCH STRATEGY (1) Assumption: Less sensitive to economic schocks (Wagner), but a difference can be expected (Aghion)

10. High ratio Equity/total assets Quantile 4 Low/medium ratio Equity/total assets Quantile 1-3 10 PATENT APPLICATIONS 1997-2010. Difference: Brown and Petersen (2009)

11. Access to financial services and other knowledge intensive services Low Medium High 11 PATENT APPLICATIONS 1997-2010. Difference (Lerner 2009, Backman 2013, Johansson and Lööf 2014))

12. 12 Klaesson, Johansson, Olsson approach (2003)

13. 13 Geographical distribution of the 50,000 patent applications

14. 14 SECOND INSPECTION: SCHUMPETERIAN REGROUPING IN CITIES HIGH EQUITY FIRMS

15. 15 THIRD INSPECTION: FINANCIAL CONSTRAINTS IN CITIES LOW AND MEDIUM EQUITY FIRMS

16. METHODOLOGICAL APPROACH Panel data, 14 years 1,837 unique Exporters (30% persistent) 50% Low access 30% Medium Access 20 % High Access Negative Binomial Estimator 16

17. 17 TWO SPECIFICATIONS

18. REGRESSION RESULTS ALL EXPORTERS - 18

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22. REGRESSION RESULTS PERSISTENT EXPORTERS - 22

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26. WHAT DID WE KNOW BEFORE Financial constraints may hamper internal spillovers and knowledge accumulation within firms. Persistent innovation efforts over the business cycle creates a self-enforcing effect s 26

27. NEW INSIGHTS Difference between (1) firms depending on their capital structure also among exporters (selected group of firms) (2) exporters in general and firms operating persistently on foreign markets year after year (3) firms located in metropolitan regions and firms located in other places. 27

28. 28 THANK YOU FOR YOUR ATTENTION!