A Review on Financial Development and Financing Constraints Upon Corporate R&D Investment

Abstract

Firms face financing constraints when investing in R&D projects. Depending solely on internal finance, firms that face financing constraints are less likely to spend money on high-risk R&D investment that may help them gain advantages over their fellow competitors. This may also hinders innovation and economic growth. Financial development, in forms of upgrading financial structure, intensifying financial reforms and verifying financial functions, can lower the cost of firms’ R&D spending and increase sources for external finance. However, current Chinese financial system cannot perfectly perform its duty of serving real economy and boosting its growth. How to drive domestic financial market toward perfection; how to facilitate the development of banks and non-bank financial intermediaries? This is a substantial and intriguing issue that interests Chinese economics.