Capital market penalties to radical and incremental innovation

Purpose: The purpose of this paper is to investigate how access to financing for incremental as well as radical innovation activities is affected by firm-specific structural and behavioral characteristics. Design/methodology/approach: Deploying a two-stage Heckman probit model on survey data spanning the period 2000–2013 and covering 1,169 firms, this paper analyzes the effect of a firm’s engagement in incremental and radical innovation on its likelihood to get constrained in their access to external finance, and how this effect is moderated by the firm’s age and size. Findings: In line with earlier research, it is confirmed that the type of innovation matters for the access to external finance, but in a more nuanced way than generally portrayed. While incremental innovation activities have little negative effect on the access to external finance, radical innovation activities tend to be penalized by capital markets. This effect appears to be particularly strong for small firms. Originality/value: This paper provides nuanced insights into the interplay between types of firm-level innovation activities, structural characteristic and access to external finance.