25 Jul 2023

Firms deliver better innovation despite lower financial resources

High-quality innovations are not tied to high funding of companies

People sitting around a desk, work material lies in front of them

If there are fewer innovations by firms in connection with lower financial resources, these innovations clearly stand out in terms of quality.  In a SAFE Working Paper, researchers at the Leibniz Institute for Financial Research SAFE explain the causal relationship between bank lending and entrepreneurial innovation. Based on the data used for their analysis, the authors examined the patenting behavior and relationships of the companies with their banks in close detail.

“For companies, a lower level of funding often means that fewer innovations are generated in these companies. However, this does not necessarily mean a loss of quality, quite the contrary,” states Uwe Walz, one of the authors of the study.

Innovation activity depends on credit status

For their work, the researchers evaluated and analyzed the decision of the European heads of state and government in October 2011 on bank recapitalization in the EU member states, which was intended to restore confidence in the European banking market after the financial crisis of 2008. Based on this decision, the European Banking Authority shortly thereafter coordinated the capital requirements of credit institutions together with the national supervisory authorities. However, banks were often only able to meet the higher capital requirements of the recapitalization by granting fewer loans to companies. This, in turn, simultaneously led to lower innovation activity at the corporate level. For example, the number of new patent applications filed decreased significantly.

Fewer patent registrations, but better quality

“There were fewer patent applications, but citations in subsequent patent applications, patent family size – i.e., the size of the patent application group that relates to a similar content, withdrawals, and grant duration improved noticeably,” study author Walz further adds, thereby supporting the authors’ thesis that less money means less but better innovation.

The SAFE Working Paper concludes that easier access to financial resources does not necessarily lead to better innovation and higher output growth. To assess the overall effect, a more nuanced view of the results against the background of bank recapitalization is needed.

Download SAFE Working Paper No. 330 here

Scientific Contact

Uwe Walz

Prof. Dr. Uwe Walz

Bridge Professor