An interesting study: “Credit Supply and Corporate
Innovation” by Mario Daniele Amore, Cédric Schneider and Alminas Zaldokas (July 19, 2012, link) covers the impact of banking sector deregulation in the US on corporate innovation.
The authors present
evidence that “banking development plays a key role in technological progress.
We focus on firms’ innovative performance, measured by patent-based metrics,
and employ exogenous variations in banking development arising from the
staggered deregulation of banking activities across US states during the 1980s
and 1990s. We find that deregulation had significant beneficial effects on the
quantity and quality of innovation activities, especially for firms highly
dependent on external capital and located closer to entering banks.
Furthermore, we find that these results are partly driven by a greater ability
of deregulated banks to geographically diversify credit risk.”
Figure 1 shows “the
association between state-level innovative activity, as measured by the number
of patents, and the total bank credit supply in the state. While it suggests
that wider access to bank loans may be associated with a higher degree of
innovation, this evidence is plagued by the endogeneity of financial
development. Arguably, general economic conditions, industry characteristics
and other unobserved factors may influence both firms’ innovation and credit
availability, thus biasing the effect of finance on technological progress. In
addition, the effect may even be reversed if firms with higher value-added
projects create demand for more efficient financial institutions. Our
contribution is to establish the causal effect of banking development on
innovation.”
Main results:
Patents:
“Our result suggests that deregulation had a beneficial effect on
the number of patents over the analyzed period. In particular, allowing
out-of-state banks to enter the state led to a significant increase in the
number of granted patents after controlling for state and application year
fixed effects.”
“allowing out-of-state banks to enter the state increased corporate
innovation by 13.8%”
Overall: “the deregulation coefficient [is] both statistically and
economically relevant, indicating a 12.6% increase in patenting” due to
deregulation.
Quality of innovation:
The study also shows that deregulation has led to an increase in quality of
innovation as measured by the quality and nature of patents. “…interstate
banking deregulation led to a significant and economically relevant increase in
the quality of patents. … indicating a 10.1% increase in expected forward
citation counts.” “…interstate banking deregulation had a positive and
significant effect on the generality of patents: firms subject to deregulation
exhibited a higher propensity to patent within broader technological fields,”
and “firms increased the originality of patents” in response to financial deregulation.
“Taken together with our previous finding on citations, these results reinforce
the notion that deregulation induced a change in the type of firms’ innovative
activities. More general and original patents require a bolder innovation
policy. The results also further suggest that firms did not simply patent
existing innovation to provide hard information to out-of-state banks.”
Effectiveness over time:
Dynamic effects “…become larger as we move forward from the reform year,
with the largest effect corresponding to six and seven years after interstate
banking deregulation.”
Industry effects:
“…the positive
effect of interstate banking deregulation on firm innovation is more pronounced
for firms operating in industries that are highly dependent upon external
finance.”
Effects on financial constraints:
“Turning our attention to firm-level characteristics, we further posit that
our finding should be stronger for firms that were more dependent upon bank
credit prior to deregulation. …the effect of deregulation on firm patents was
positive and statistically significant both for young and non-young firms.
However, the economic magnitude is much larger among young firms: while young
firms subject to interstate banking deregulation experienced a 22.7% increase
in patents, the effect is 11.7% for non-young firms.” So that
Alternative channels of funding:
“Next, we sort firms according to whether
they were assigned a long term bond rating by Standard&Poors. By allowing
firms to access public debt markets, a bond rating is related to lower credit
constraints …and, consequently, lower responsiveness to changes in bank
finance. We construct two subsamples depending on whether a firm reports a bond
rating or not in any year of the period 1985-95. …the deregulation
effect on innovation is significantly larger for firms experiencing tougher
access to the public bond market. In fact, … firms that do not have public
bonds outstanding over 1985-95 experienced an increase in innovative activities
after the interstate banking deregulation while there was no statistically
significant effect for firms that were active in the public bond market.”
Effects on industry output:
“The last step of our analysis is to test the association between
industry-level output growth and innovation following deregulation. We posit
that the increased innovation stemming from deregulation fostered output growth
favoring the most efficient firms within an industry. …we observe that the
effect of deregulation laws on firm patenting was largest in primary metal,
furniture and fixtures and petroleum refining and related industries. When we
compare these industry-level effects to future industry growth, we find a close
relationship. …A positive relationship, significant at 7%, suggests that
industries where deregulation had a higher impact on patenting experienced a
subsequent increase in output growth. For instance, the five industries with
largest deregulation estimates grew, on average, by 4.9% annually over 1995-
2000. By contrast, the five industries with the smallest deregulation estimates
grew, on average, by 0.2%. Furthermore, we find no difference in growth rates
between these groups of industries prior to deregulation (in 1980-85), and also
we find that the association fades away over a long period.”
