The Small, the Young and the Innovative: A Panel Data Analysis of Constraints on External Innovation Financing

This article investigates how access to external financing for innovation activities is affected by firm-specific structural, behavioral and outcome characteristics.  External financing represents a critical factor in determining industrial evolution and technical change as well as firm's ability to survive, grow, and engage in innovative activities. Some characteristics of firms particularly associated with innovative and entrepreneurial ventures driving technological change are said to cause information asymmetries between financiers and finance seekers, making them less likely raise necessary external capital to fund innovation projects. Yet, there is little known about how different combinations of these characteristics affects their access to external financing and how contextual factors matter. Deploying a two-stage Heckman probit model on a panel data set spanning the period 2000-2013 and covering 1,169 Danish firms, we test hypotheses derived from the literature regarding the impacts of firms structural, behavioral and outcome characteristics on the firm's likelihood to get constrained in their access to external innovation finance. In line with earlier research we find that indeed 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.