The Impact of Funding on Innovation: Evidence from Spain

Funding is crucial for the companies, and plays a major role on a country’s economic growth promoting innovation (Fazzari and Petersen, 2009; Hsu, Tian and Xu, 2014; Comin and Nanda, 2014). According to Peirce (2014) finance is a key ingredient in innovation, and innovation is a factor of unparalleled importance for the economy, as a whole. Thus, investment in innovation is a priority for European companies, but just as Hall and Lerner (2010) evidenced a "funding gap" for investment innovation in USA companies, this happens nowadays in European companies due to the lack of resources, which has caused the global financial crisis.

The objective of this work is to analyze in depth the impact that funding on innovation, with the aim to reduce the gap in the innovation funding. To achieve this, on the one hand, an analysis of how Spanish companies are financed was carried out (internal financing, external, type…), and on the other hand, identifying the effects on innovation (type of innovation: process, product, on results, productivity, etc.). For our study we focus on SMEs because 99.8% of European companies are SMEs, in Spain is around 99.9%, occupying approximately 66.6% of total workforce (INE, CCD 2014 Annual Reported on European SMES 2013/2014), and therefore, SMEs are the main driver of the economy in Europe. In view of the above, for that, we analyze a sample of 10,470 Spanish SMEs by a quantitative analysis before, during and after the crisis.

The findings from our empirical study show the impact of financing on innovation in Spanish SMEs, evidencing the sectors that are more likely to innovate, internal financing problems, high costs incurred by them, and the problems of external funding. This last finding we consider the most interesting because it shows that Spanish companies, unlike Anglo-Saxon companies, are reluctant to opt for alternative ways of funding, as such: venture capital (VC), crowdfunding or mutual guarantee societies. Therefore, our future line of research will focus to study what causes it.

We consider the work provides added value, because funding is key to promote the growth of the companies, and in this particular study, Spanish SMEs. It not only makes companies more competitive, what is crucial for economy, but also generates benefits to society, by creating jobs, improving the quality of live, among others. Furthermore, it is vital to detect and implement policies of useful funding for business to overcome one of the main obstacles to innovation.