The primacy of demand and financial obstacles in hindering innovation

We study the effects of different types of obstacles to innovation on the probability of obtaining different firm-level innovation outcomes. We consider financial, knowledge, cooperation, regulatory and demand-related obstacles, which we separate into two categories: market structure and lack or uncertainty about demand. Using a pooled sample of four Chilean innovation surveys and an instrumental variables approach novel to this literature to address endogeneity, we find that only demand and financial barriers seem to have a negative effect on the probability of generating innovations. When financial or demand barriers are present, they seem to be binding and take prevalence over all other obstacles, and when they are absent, other barriers become significant. We provide evidence of heterogeneous effects on different sectors, considering not only manufacturing and services but also primaries, a comparison that has not been previously conducted and holds relevance for developing economies. We show that knowledge obstacles are relevant to manufacturing and market structure and regulatory obstacles are relevant in the services sector, while demand and financial obstacles appear to matter across the board. The pervasiveness of financial and demand obstacles, their relationship with the remaining barriers, and the observed sectoral differences have important policy implications.