Public development finance and firm innovation

Abstract

This paper empirically examines the impact of public development finance on firm innovation using loan data from public development finance institutions. The findings reveal that an increase in the size of loans from these institutions significantly enhances firm R&D investments and outputs, primarily reflected in substantial innovations, particularly in invention patents. The effect of public development finance on innovation varies depending on the nature and technological focus of the firm. Public development finance influences innovation through two main channels: financing constraints, which lower the cost of financing for firms, and infrastructure improvements, which enhance the overall business environment. Additionally, public development finance has a significant positive effect on firm value, driving increased corporate innovation.