Innovative Firms’ Cash Needs and Country-level Institutional Environments

Analyzing innovative firms' patent and financial data in 23 countries over 1990-2012, we find that more innovative firms hoard more cash for technology competition and opportunities. Our instrumental variable regression analysis based on the patent rights index supports a causal interpretation for such a pattern. Innovative firms' cash needs are more pronounced in countries with less developed financial markets, in countries with institutions and infrastructures more conducive to innovation, as well as in more competitive industries. This pattern is also stronger for high-tech industries, for industries that are more dependent on external financing, as well as for firms that are more financially constrained. Lastly, we find that innovative firms with higher cash holdings invest more in future R&D and generate more patents