Financing, innovation and growth linkage is a multi-stage process. First, access to finance has a leverage effect on innovation and secondly this additional innovation has an impact on growth. However, few authors have assessed the effect of these three components at the same time. Furthermore, the scientific literature usually focuses more on assessing only the effect of one type of source of financing, such as public support or venture capital, on innovation or firm growth. The aim of the present study is to go further and to assess the effect of eight different sources of financing (internal funds, bank loan, credit line, trade credit, grants, equity, leasing and factoring) on innovation and then on firm growth. Using data from the Survey on the Access to Finance of Enterprises and a three-step econometric approach, the study provides evidence that external sources of financing have a positive effect on innovation and then an additional effect on firm growth (turnover and employment). However, not all sources of external financing have the same impact.
Equity financing has a larger effect on the strategic decision to innovate, and the highest output additionality on firm turnover growth, when compared to the effects of other sources of financing.
Grants registered a moderate effect on innovation and on output additionality on firm growth (both turnover and employment) and its effect does not appear to be statistically different from other financing instruments (excluding equity). Moreover, grants show higher employment growth than turnover. Furthermore, the number of financing instruments used together also seems to matter, revealing that a financing instrument used alone has no effect on innovation. Our findings suggest that state aid to promote R&D and innovation needs to rely on sounder public/private support integration for it to be successful. All these conclusions could be particularly useful for policy-makers since recommendations for a European Innovation Council
Financing; Innovation; Firm growth; Europe