Does development of financial markets help firm innovation? Evidence from China

This paper examines the impact of financial market development on firm R&D investment. Using hand-collected R&D investment data of 221 high-tech firms listed in China's small and medium-sized board in the period of 2009-2015, we find that equity financing, particularly internal cash flow, is the main source for R&D investment of high-tech firms. Mature firms make more use of debt financing than young ones and are faced with less severe financial constraints. The development of financial markets relieves the dependence of R&D investment on internal capital, and the effect is more recognisable in young firms than in mature ones. However, the constraint of debt financing is not alleviated as much as that of equity financing by financial deepening, which suggests that debt markets still need developing, and more favourable policies are necessary for innovative firms.