RESEARCH-AND-DEVELOPMENT AND INTERNAL FINANCE - A PANEL STUDY OF SMALL FIRMS IN HIGH-TECH INDUSTRIES

Since Schumpeter, economists have argued that internal finance should be an important determinant of R&D expenditures. Yet almost without exception, previous empirical studies have not found evidence of such a relation. Using newly available data, we investigate this puzzle with a panel of 179 small firms in high-tech industries. Under each estimation strategy we employ, we find an economically large and statistically significant relationship between R&D investment and internal finance. Our results are consistent with the view that, because of capital market imperfections, the flow of internal finance is the principal determinant of the rate at which small, high-tech firms acquire technology through R&D.