I provide new empirical evidence on the negative relationship between financial frictions and productivity growth over a firm's life cycle. I show that a model of firm dynamics with incremental innovation cannot explain this evidence. However, further including radical innovation, which is very risky but potentially very productive, allows for the joint replication of several stylized facts about the dynamics of young and old firms and the differences in productivity growth in industries with different degrees of financing frictions. These frictions matter because they act as a barrier to entry that reduces competition and the risk-taking of young firms.
"Financing Constraints, Radical versus Incremental Innovation, and Aggregate Productivity."
American Economic Journal: Macroeconomics,
Firm Behavior: Empirical Analysis
Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
Intertemporal Firm Choice: Investment, Capacity, and Financing
Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
Firm Performance: Size, Diversification, and Scope
Industry Studies: Manufacturing: General
Innovation and Invention: Processes and Incentives