The Role of Liquidity Constraints in Fuelling The Demand-Pulled Innovation

The motivation to classify industries in their effort to innovate with the structure of demand, lead to a theoretical controversy in innovative activity known as ‘demand-pull’ versus ‘technology-push’ forces of technical change. Previous empirical literature has provided evidence supporting demandpulled innovation both at the aggregate level and at the firm level. This paper studies a dynamic specification of the demand-pull hypothesis at the firm level, which takes into account both the within and the between effects across Turkish non-financial firms listed at Istanbul Stock Exchange (ISE) over a period of ten years (1998–2007). Moreover, the study also investigates the demand-innovation relationship in liquidity constrained firms since inducing an increase in the effort to innovate mostly depends on the funding of expensive and uncertain R&D activities. Our findings confirm the demand-pull hypothesis, yet the role of sales in inducing R&D expenditures is 99% significant in the overall sample. More specifically, liquidity constrained firms and firms not receiving public subsidies seem to be particularly sensitive to sales when deciding how much to spend on R&D.