Working Papers

Small firms induce more radical innovation, improving the market entry and exit dynamics by obsoleting older technologies. Firms require external finance to innovate and retain competitiveness. Compared to larger firms, small ones are more financially constrained. Yet, banks favor big firms by offering small firms different menu choices with higher interest rates, shorter maturities, and more collateral requirements. I provide some new evidence on the nature of this relationship across low-, middle-, and high-income countries. Then, I integrate these stylized empirical facts into a Schumpeterian growth model with heterogeneous firm dynamics. Counterfactual policy interventions to alleviate big firm suggest a 10% to 21% increase in the economic growth rate in the US.