Financial shocks and firm innovation in supply chain networks

We study the influence of supply chains on the transmission of financial shocks to firms’ innovation. Using matched Italian firm-bank data over the 2007–2017 period, we find that firms’ engagement in supply chains enhanced the resilience of innovation activities to the banking shock caused by the “twin financial crises” (Great Financial Crisis and sovereign debt crisis). The results suggest that, amid the banking shock, supply chains facilitated purchases of innovative intermediates through trade credit provision and helped to sustain firms’ joint research and development efforts. The estimates imply, however, that the support offered by supply chains did not extend to radical product advances.