Innovation, financial constraints and relationship lending: evidence from Italy during the recent crises

Financial frictions may represent a severe obstacle to firms' innovativeness. This paper shows the existence and quantifies the effects of financial barriers to the innovation propensity of Italian companies. Employing direct measures of financial constraints and a credit-score estimated ad hoc, I find firms that suffer from financial problems to have a probability of innovating that is significantly lower than sound companies (-30%). The paper also documents the existence of a feedback-effect of innovation on firms' financial position. Results suggest that the innovative propensity of a company is further affected by the consequences that the choice to innovate has on the likelihood of facing constraints. This in turn is reflected onto a stronger depressive effect of financial constraints on innovation (-34%). Finally, the paper also provides evidence on the role of soft information in mitigating financial obstacles for innovative companies. Relationship lending is found to improve the financial condition of more opaque (small) borrowers and to reduce the overall effect of financial constraints on innovation.