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Financial Constraints, Innovation Quality, and Growth

November 26, 2020

Kuala Lumpur Research Seminar Series

  • This paper investigates the role of financial constraints in shaping innovation quality and firm-growth dynamics through heterogeneous innovation. I build a unique data-set combining patent activities with the operating data of private Chinese manufacturing firms and show a strong negative relationship between the severity of financial constraints and a) firm growth, b) innovation intensity, and c) innovation quality. Based on these empirical regularities, I build a tractable endogenous growth model in which a multi-product firm invests in heterogeneous innovation in the face of imperfect financial markets. Tighter financial constraints cause firms to undertake more low-quality innovation, which yields temporary payoffs but no longer-term productivity improvements. This lowers firm and aggregate growth rates. The quantitative model suggests financial frictions reduce incumbents' R&D investment by 19.94% on average and slows aggregate annual productivity growth by 10.2 percent (0.4 percentage point annually).

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    Presentation Slides

  • Yu is an Economist and her research interests span the areas of macroeconomics, innovation, and economic growth. Her ongoing projects study the dynamic effects of financial and information frictions in firms’ innovation and investment decisions.  Yu holds a Ph.D. in Economics from the University of Southern California (2020) and an M.A. in Economics from Duke University (2014).


  • WHEN (KUALA LUMPUR TIME): Thursday, November 26, 2020: 9:00 -10:00am
  • WHEN (ET/WASHINGTON, D.C. TIME): Wednesday, November 25, 2020: 8:00 – 9:00pm