Do knowledge conditions make a difference?

This paper examines the impact of industry knowledge conditions, the mode of corporate control and firm size on tangible investments and its financing. Based on a large panel data set of German firms we investigate whether financing constraints exist for tangible investment and whether there is systematic variation across firms engaged in activities reflecting different knowledge conditions. In particular, we compare the extent of financing constraints for firm in knowledge intensive (hi-K) industries with those in less knowledge-based (lo-K) industries. This distinction is important because knowledge-based economic activity tends to be subject to high degrees of uncertainty, asymmetric information and spillovers of newly created knowledge, making access to external sources of finance difficult. Our surprising empirical finding is that firms in hi-K industries are less finance constrained than are their counterparts in lo-K industries. However, the mode of corporate control and firm size play an important role. After controlling for firm size and manager versus owner control, we observe that the small manager-controlled firms in both hi-K and lo-K industries are most finance constrained. By contrast, no financing constraints seem to exist for the smaller owner-controlled firms in hi-K industries. This latter result contrasts sharply with results of Anglo-Saxon studies.