Financing Local Innovation

Rui Yu, Business Economics and Public Policy, The Wharton School

Abstract: What is the impact of financing on innovation, and how do entrepreneurs strategically access credit? Innovative ventures need advance financing, but they face unique obstacles to credit access. Though venture capital funding enjoys perceived prominence, the bulk of start-up lending originates from traditional banks. I examine the impact of bank lending on start-up innovation by leveraging a novel quasi-experiment on credit supply. Plausibly exogenous changes to bank credit is linked to subsequent firm patent origination. The empirical design is expanded to investigate how geography and proximity affect innovation financing. These results enhance our understanding of the role of banking networks in financing innovation. Moreover, they empirically evaluate the role of credit access as an agglomerating force for innovation hubs.