When credit bites: financing constraints and the innovation–export link

This paper investigates how financial frictions shape the joint dynamics of firms’ innovation and export behavior. Using firm-level survey data for Italian manufacturing companies, we document a mutually reinforcing relationship between innovation and exporting: innovation increases both the probability of exporting and the intensity of foreign sales, while export participation raises subsequent innovative effort. Credit rationing constrains both activities, limiting firms’ ability to invest in R&D and to expand in foreign markets. Its effects, however, are asymmetric: financial constraints systematically depress innovation, but they hinder exporting only among non-innovative firms. Innovation thus partly insulates firms from the adverse impact of tight credit on internationalization. Overall, the results underscore the role of financial frictions in shaping firms’ strategic choices and suggest that policies fostering innovation may indirectly promote export participation in credit-constrained environments.