Abstract

The purpose of this study is to examine the role of different sources of finance on R&D investment decisions in Italian manufacturing firms. Accounting data, taken from the Aida database, are collected over the 2006-2013 years. The empirical evidence shows that the availability of external financing primarily affects the decision to engage in R&D activity rather than R&D intensity. Internal cash flow, on the contrary, does affect both the likelihood of whether firms will undertake any R&D and the size of R&D spending. This impact is strongly significant for financially weaker firms, SMEs and high-tech firms. Due to greater asymmetric information problems, small innovative firms mainly rely on cash-flow to finance innovative projects. Since bank loans and other forms of debt are not well suited for R&D-intensive activities, our study would contribute to the debate whether it might be socially desirable to incentivize alternative small business financing options, still limited in Italy.

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