Does Internal Finance Matter for R&D? New Evidence from a Panel of Italian Firms

This paper investigates the relationship between finance and Ramp;D for a panel of more than 1000 Italian manufacturing firms. While Italian firms obtain a significant share of their financing from debt, the results from a unique survey show that firms use virtually no debt to finance Ramp;D. Because Italian firms typically do not receive external equity, the obvious source of innovation financing is internal cash flow. I estimate the sensitivity of capital investment to cash flow for small and medium-large firms, testing for the presence of informational frictions in the credit market for companies performing Ramp;D activities. I use a GMM method that controls for unobserved firm-specific effects and endogenous explanatory variables. Cash flow plays an important role in explaining capital investment, especially for small firms. Interestingly, when I consider measures of firms' innovative activities, I find significant differences between the sub-samples of small and medium-large firms. While small innovative firms are subject to relevant financing constraints, larger companies investing in Ramp;D have easier access to external financing