Financial and knowledge barriers to innovation: Complementary and substitution effects on innovative effort

Innovation studies have thoroughly analysed how firms' perception of barriers affects their innovative behaviour. We contribute to this line of research by analysing complementary and substitution effects between financial barriers, internal knowledge barriers and external knowledge barriers on firms' innovative effort. Using a panel data set of Uruguayan firms between 2006 and 2015, we add to empirical studies on this topic by estimating both unconditional and conditional complementary and substitution effects between these innovation barriers. We apply an econometric two-step specification that includes an estimation of instrumental variables, which allows us to control for endogeneity biases in the supermodularity and submodularity tests. We find significant evidence that external and internal knowledge barriers reinforce each other's effects (complementary effects), conditional on the absence of financial barriers. We also find that financial and internal knowledge barriers mitigate each other's effects (substitution effects) conditional on the firm's perception of external knowledge barriers. Additionally, we find substitution effects between financial and external knowledge barriers, conditional on the firm's perception of internal knowledge barriers. We discuss these results against the backdrop of Uruguayan innovation policies during the period studied, and stress the necessary articulation between instruments that will help strengthen firms' innovation management to recognize and manage innovation barriers.