Journal of Economics & Management Strategy vol:20 issue:1 pages:121-157
We analyze financial constraints on R&D, where we account for heterogeneity among investments that has been neglected in previous literature. According to economic theory, investments should be distinguished by their degree of uncertainty, e.g. routine R&D versus cutting-edge R&D. Financial constraints should be more binding for cutting-edge R&D than for routine R&D. Using panel data we find that R&D spending of firms devoting a significant fraction of R&D to cutting-edge projects is curtailed by credit constraints while routine R&D investments are not. This has important policy implications with respect to the distribution of R&D subsidies in the economy.