Is there a Connection between Finance and Innovation?
Is there a Connection between Finance and Innovation?

Summary/Abstract: Within the current macroeconomic environment, innovation activity, especially a radical one, is developed under extreme uncertainty conditions. A number of studies have proven the existence of severely asymmetrical information generated by innovation activities. Our research objective focuses on whether or not the development of financial systems influences the level of innovation, also analyzing the real impact of several features of the financial system on the overall innovative process of a country. In this respect, we propose a two-fold contribution. First, we address the impact on innovation which is exercised by the financial intermediation entities granting credits to the private sectors of the economy. Such a ‘financial resources availability’ view excludes the role played by financial markets or by the firms’ internal resources. Second, we employ a Bayesian nonparametric empirical framework that can deal with various types of uncertainty about the ‘true model’ governing the relationship between finance and innovation. Our findings show that, at an empirical level, finance does matter in explaining the status of innovation processes and outcomes. However, this conclusion should be nuanced by adding that different features of the financial system have a non-uniform importance: while the global supply of financial resources through credit granted to the private sector is putting forth a positive and robust influence on innovation, the expansion of commercial banks network appears to play a more ambiguous and less robust role. Additionally, the existence of geographically spread specific mechanisms clearly influences the amplitude and shape of financial variables’ impact on innovation. It is our view that the paper may contribute to proving that the development, as well as the functional capabilities of the financial systems, are highly relevant for the status of innovation processes in modern ‘knowledge-based’ economies.

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