Risk capital, private credit, and innovative production

Although ideas production plays a critical role for growth, there has been only a modicum of research on the role played by financial forces in fostering new inventions. Drawing on Schumpeterian growth theory, this paper tests the roles of risk capital and private credit in stimulating knowledge production. Using panel data for 77 countries over the period 1965-2009, we find that countries with more developed financial systems are more innovative. A stronger patent protection framework, on the other hand, curbs innovative production.