Finance and Innovation
Team Leaders: Tim Besley, Isabelle Roland, Richard Lambert
Accessing finance for investments, especially in technology is often very challenging. Ideas do not have collateral in the same way that tangible investments do, so banks may be reluctant to lend. The asymmetric information problem that lies at the heart of financial frictions is likely to be stronger for innovation than other investments.
So it has long been thought that SMEs are likely to suffer most from these problems, especially in the UK where financial institutions have logn been accused of short-termism. These were highlighted in the Global Financial Crisis, and Britain's poor performance since then has often been thought to have a financial aspect.
Yet the links between finance and productivity are not well understood. In recent work, we have been developing a theoretical framework for the link between financial frictions and economic performance. We are implementing this using a mix of default probability data (from Standard and Poors); company accounts data and administrative panel data. See "The Aggregate Effects of Credit Market Frictions: Evidence from Firm-level Default Assessments".
An extension to this is to combine this financial data with innovation data from the ESRC "FutureTech" project. In this project, we harness web-scraping tools to develop broader indicators of innovation than the usual measures (e.g. patents, R&D, TFP). We are combining traditional data on firms with sources such as Beauhurst who track "high-growth" firms and provide detailed text-based data on their activities and information on fundraising.