Financial constraints, productivity, and the global financial crisis

This study investigates the effects of firms' financial constraints on their productivity by considering firms' ownership structure and characteristics using a manufacturing firm-level dataset from South Korea for the period 2006-2017. The System Generalized Method of Moments results indicate that foreign multinational corporations rarely experienced financial constraints on their productivity, whereas the effects of financial constraints on productivity were aggravated for domestic firms during the global financial crisis. Particularly, small, young, and unaffiliated domestic firms experienced more severe financial constraints, especially during the global financial crisis, than did large, old, and affiliated domestic firms. The results show that small, young, and unaffiliated domestic firms which invested in R&D activity were less financially constrained than those without R&D activity. Based on the Heckman two-step estimation results, financial factors significantly affected R&D investment; thus, severe financial constraints hindered optimal R&D investment, which is necessary for productivity enhancement. Therefore, financial market failure during the global financial crisis resulted in productivity polarization. Hence, policies that relax financial constraints for innovation activity, such as R&D subsidies and tax exemption incentives should be targeted to financially vulnerable firms, such as small, young, and unaffiliated domestic firms. These policies should be strengthened during a financial crisis.