Innovation Credit Expansion, Resource Misallocation, and the Quality of Economic Growth

Abstract

This paper investigates the dual impact of innovation-oriented credit expansion on the quality of economic growth, specifically examining the tension between capital mobilization and resource misallocation. While credit targeted at research and development (R&D) is theorized to alleviate liquidity constraints and spur productivity, its efficacy is often moderated by the prevailing institutional framework and the efficiency of the banking sector. Utilizing a cross-country panel data approach combined with firm-level evidence, this study causally examines how different forms of innovation credit—ranging from traditional bank lending to specialized development finance—affect Total Factor Productivity (TFP) and the "quality" of innovation as measured by patent citations and radicalness. The findings suggest a non-linear relationship: in environments with high institutional quality, credit expansion fosters high-impact innovation; however, in the presence of weak credit screening or soft budget constraints, such flows exacerbate resource misallocation toward "low-quality" innovators or "zombie" firms. This paper contributes to the endogenous growth literature by identifying the financial and institutional thresholds necessary for credit-driven innovation to translate into sustainable long-term growth.