ABSTRACT
This chapter argues that the extent and quality of financial intermediation will affect the efficiency with which factors are allocated within the firm. The connection between Research and development (R&D) and finance is twofold. First, finance is especially important for small firms, and there is considerable evidence that small firms account for a disproportionately large number of innovations. Second, regardless of firm size, R&D activity is the most difficult to monitor since inventive activity is not usually routinely observable. The effect of finance on technology adoption, especially in small firms, may be overestimated for one important reason: successful R&D programmes are likely to lead to more external financing. Costello carries out a cross-country study of technical change in which several sectors of the economy are considered. The cross-country correlation between F and either the primary or secondary enrolment rate is positive.
