6 Innovation, Credit Constraints, and Trade

Topics: Economics, Innovation, Empiricism Pages: 23 (7642 words) Published: July 14, 2013
SCHUMPETER DISCUSSION PAPERS

Innovation, Credit Constraints, and Trade Credit:
Evidence from a Cross-Country Study

Werner Bönte Sebastian Nielen

SDP 2010-005 ISSN 1867-5352

© by the author

SCHUMPETER DISCUSSION PAPERS 2010-005

Innovation, Credit Constraints, and Trade Credit: Evidence from a Cross-Country Study Werner B¨nte and Sebastian Nielen∗ o Schumpeter School of Business and Economics University of Wuppertal

Abstract This paper studies the relationship between trade credit and innovation. While trade credit is well researched in the finance literature, its link to innovation has been neglected in prior research. We argue that innovative small and medium-sized enterprises (SMEs) are more likely to use trade credit than non-innovative SMEs because of credit constraints and that business partners may have incentives to offer trade credit especially to innovative SMEs. The relationship between innovation and trade credit is empirically examined by using a sample of SMEs from 14 European countries. The results of an econometric analysis confirm a positive relationship between innovation and trade credit. In particular, SMEs with product innovations have a higher probability of using trade credit than other SMEs. Moreover, the results suggest that the effect of product innovation is only statistically significant if SMEs report that access to financing or cost of financing are obstacles for the operation and growth of their businesses. Hence, the results point to the relevance of trade credit as a source of shortterm external finance for innovative SMEs which are credit constrained. JEL-Codes: G32, O31, L20 Keywords: trade credit, innovation, credit constraints



Email: boente@wiwi.uni-wuppertal.de, nielen@wiwi.uni-wuppertal.de

SCHUMPETER DISCUSSION PAPERS 2010-005

1

Introduction

Many firms allow their customers to delay payment for goods already delivered and by offering trade credit they enable their business partners to cope with liquidity problems. The results of empirical studies show that trade credit is a very important source of short-term external finance.1 To date, a number of empirical and theoretical studies analyzed the demand for trade credit and the provision of trade credit: With respect to the demand for trade credit findings suggest that bank credit constrained firms are more likely to resort to trade credit (Biais & Gollier, 1997; Petersen & Rajan, 1997). Suppliers may be willing to provide trade credit to their customers if they have better information about the business and the credit risk of their customers than banks and if they have less problems to obtain external finance than their customers (Schwartz, 1974). Moreover, firms may provide trade credit in order to price discriminate since lengthening the credit period implies a reduction in the effective price (Chee K. NG, Smith, & Smith, 1999). Hence, suppliers may be more willing to offer trade credit to the most price elastic segment of the market, e.g. credit rationed firms, or they may price discriminate because they may have long-term interest in the survival of the business partner (Petersen & Rajan, 1997). This paper contributes to the existing literature by studying the link between trade credit and innovation. We argue that especially innovative small and medium-sized enterprises (SMEs) have an incentive to resort to trade credit and at the same time are more likely to be offered trade credit by their business partners. SMEs are per se more likely to be credit constrained than larger firms (Beck, Demirgc-Kunt, & Maksimovic, 2005) but this may be even more severe for innovative SMEs. If an innovative SME needs short-term external finance it may be credit rationed because banks may have problems to scrutinize the value of the innovative SME and because its intangible assets cannot be used as a collateral for bank loans. Hence, innovative SMEs having problems to obtain sufficient external financing may resort to trade credit....
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