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Innovation, Trade and Finance

Type of publication Peer-reviewed
Publikationsform Original article (peer-reviewed)
Publication date 2015
Author Keuschnigg Christian, Egger Peter,
Project Taxation, Banking, and Sovereign Risk
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Original article (peer-reviewed)

Journal American Economic Journal: Microeconomics
Volume (Issue) 7(2)
Page(s) 121 - 157
Title of proceedings American Economic Journal: Microeconomics
DOI 10.1257/mic.20120032


Heterogeneous firms invest in R&D and expansion investment.Venture capital specializes in R&D financing where problems are largest. Marginal firms get funded by venture capital, while firms with larger debt capacity obtain cheaper bank financing. In the latestage, cash-rich firms invest at an optimal scale, while cash-poor firms are restricted. A country's financial and institutional development determines entry and expansion of firms and their comparative advantage in producing innovative goods. We illustrate how tariffs, R&D subsidies, institutional reform and venture capital improve access to capital, expand innovative industries, boost national welfare and may result in ambiguous international welfare spillovers.