Overcoming barriers to research and innovation in firms: A study of financial and non-financial constraints

Abstract: Firm-level Research and Innovation (R&I) are vital for firm competitiveness, and for the development of economies and societies. Yet, firms’  engagement in R&I remains low, especially in the European Union (EU) when compared to other advanced economies. A dominant view in academic and policy spaces is that this is mainly due to market failures and financial constraints  hindering firms’ R&I activities. Governments in many countries thus, provide  firms with public financial support for R&I to address such issues. Firms, however, typically experience other non-financial constraints affecting their R&I activities. Most notably, firms may suffer from a lack of human capital, and/or a lack of partners with whom to engage in collaborative R&I. Firms may also experience a  lack of demand for R&I. While the literature has identified the importance of non-financial constraints, our understanding of how firms can overcome them, and the types of policy interventions that may help firms to do so, remains very limited.  This is a major limitation that prevails in the literature, as non-financial constraints  can negate existing policy efforts to drive R&I in firms. 

My PhD research addresses the above knowledge gaps, by critically  analysing the nature of firms’ financial and non-financial constraints, and how  public financial support for R&I can help firms to overcome them. The focus on public financial support for R&I as a means to address financial and non-financial  constraints, builds on a growing literature which highlights such support as having important behavioural and learning effects in firms. The impacts of public financial support for R&I on firms’ non-financial constraints, however, have not, heretofore,  been critically examined. To address these issues, the research builds a novel and highly detailed dataset comprising information on firms’ R&I activities and their  constraints. These firm-level data are merged with administrative data on public  financial support for R&I available to firms in Ireland obtained from Ireland’s three  main funding agencies: (a) Enterprise Ireland (EI); (b) the Industrial Development  Agency (IDA) Ireland; and (c) Science Foundation Ireland (SFI). Data on R&D  tax credits from Ireland’s Revenue Commissioners are also merged. The analysis  uses econometric techniques, such as instrumental variables (IV) and propensity  score matching, to mitigate potential endogeneity and self-selection biases associated with the receipt of public funding, and firms’ perceptions of constraints. 

The research finds that firms’ financial and non-financial constraints are  endogenous and dynamic, in the sense that they arise as firms engage in more  knowledge and resource intensive R&I activities. Furthermore, as firms gain deeper R&I capabilities, they are more equipped to overcome their constraints. In this context, the research finds that, by encouraging more R&I in firms, public financial support for R&I can indeed help firms to overcome their financial and  non-financial constraints. These insights are critical, as they advance an understanding of a topic which, hitherto, remains largely unexplored. They are also highly policy-relevant, as they could potentially inform how policymakers can use existing policy instruments in new ways, such as using public financial support for R&I to address firms’ non-financial constraints.