To what extent do financing constraints affect Chinese firms' innovation activities?

We investigate the extent to which financing constraints affect the innovation activities of over 120,000 mainly unlisted Chinese firms over the period 2000–2007. Based on a variety of specifications and estimation methods, we document that Chinese firms' innovation activities are constrained by the availability of internal finance. Specifically, private firms suffer the most, followed by foreign firms, while state-owned and collective enterprises are the least constrained. Moreover, the availability of internal finance represents a particularly binding constraint on the innovation activities of small firms, located in the coastal provinces, with low political affiliation, and fewer state shares, as well as for sole proprietorship firms.