Regional Financial Soundness and R&D Activities

In order to explore the impact of financial factors on the real economy, many researchers are analyzing the relationship between finance and real economic activity using new theories and approaches. This paper focuses on the relationship between financial soundness and corporate R&D activities on a regional scale. By measuring regional financial performance using data series including periods of financial crisis and recovery (from the end of the 1990s to the middle of the 2000s), this paper statistically examines the correlation with factors such as corporate R&D expenditure. Analysis of the whole sample including large corporations reveals that regional financial soundness and R&D activities have a positive, albeit weak, correlation. However, a stronger correlation is observable if we (i) narrow down the sample to small and medium-sized enterprises (SMEs), which are more strongly affected than large corporations by adverse financial conditions, and (ii) use as an independent variable a common component capturing the trends from multiple banking financial indicators. This holds true even if we take into account the possibility that financial soundness might be endogenous or non-financial elements of the regional economy might have impacts on R&D activities. In addition, the correlation becomes even stronger if we take into account, through a Tobit model, the effect of corporations in the sample not actually performing R&D activities. This paper’s empirical findings suggest that regional finance plays an important role in revitalizing regional economies. Policies on a regional scale for stabilizing the financial system would also be meaningful in the development of regional economies. JEL classification: G31, L26 and O30