Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

Abstract: This paper explores how financial constraints affect intangible investment for knowledge intensive and less capital intensive firms. In this paper, a knowledge intensive firm implies a firm supplying knowledge intensive services which requires the firm to hire highly educated employees. In economics investment is defined as the act of incurring an immediate cost in the expectation of future reward, which also fits to the hiring of skilled employees. Drawing advantage of unique firm-level data comprising all Swedish knowledge intensive consulting firms I conclude that the accessibility to adequate collateral significantly affects the relationship between employment and internal funds at the firm level. The accessibility of adequate collateral is more important in an economic downturn than in an expansion and more important for highly knowledge intensive consulting firms. In this paper I make a novel attempt to incorporate knowledge intensive services firms into the financial constraints literature.

Keywords: Incomplete markets; asymmetric information; knowledge intensive business services; economic development

JEL-codes: D52; D82; L84; O16

30 pages, January 28, 2009

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