The Impact of the Financial Crisis on Capital Investments in Innovative Firms

This article investigates the impact of the financial crisis on decisions by innovative versus non-innovative firms regarding capital investments. This question is of particular interest, as distortions of financial markets especially affect innovative firms (i.e., firms with riskier business models) and thereby impact economic growth. The empirical test is based on German establishment data for the years 2004–2011, thus before and during the recent financial crisis. It turns out that innovative firms using external sources for investment finance reduce their capital expenditures during the financial crisis to a larger extent than (i) non-innovative firms using external finance and (ii) innovative firms not using external finance. Moreover, our results remain robust when we control for demand-side factors, test for effects of other financing sources like equity, employ different definitions of the treatment status, or vary the sample size. Finally, our study implies that innovative firms with their presumably riskier business models clearly suffered during the financial crisis in terms of access to financial markets, leading to a reduction in capital investments.