use R&D spending as a potentially less noisy dependent variable capturing the key input into innovation outcomes, the significance of the state ownership ( _patient_ capital) disappears. When we change our baseline measure of innovation "firm introduced a new or improved product or service in the past three years" ( _innovation diffusion or new to the firm_ ) to “firm introduced a new/improved product or service that is also new to the market in the past three years” (a subset measure of more _radical innovation_ ) and adjust for a possible selection bias using the Heckman model, the benefits of foreign-state ownership remain significant at 10 percent level with a large economic effect, similar to the one on innovation diffusion. This result complements the literature on financing radical innovation, which suggests that external firm financing for radical innovation may be best provided by equity investment intermediaries such as the venture capital industry in suitable economic environments.

The paper is organized as follows. Section 2 describes the data and methodology. Section 3 discusses the estimation results. Section 4 concludes.

# **2. Data and Estimation Methodology**

We rely on several data sources for our analysis. First, the World Bank Enterprise Surveys provide information on firms' characteristics, such as the firm's age, ownership, size, whether the firm has an active line of credit and the name of the bank the firm borrows from. We focus on the last year for which this banking information is available.

Our sample consists of over 22,000 firms from 49 countries.<sup>1</sup> Firms tend to be small, with fewer than 20 employees, and relatively old, on average 20 years old. Less than one-third of the firms have access to a line of credit, and less than one-fifth has introduced a new product or service over the past 3 years.

Second, FitchConnect provides information on banks and financial institutions. We follow Micco et al. (2007) and Panizza (2022) to assess whether a bank is state-owned. Specifically, we define a bank as stateowned if at least 10% of its assets are owned by the state.<sup>2</sup> A bank is classified as "state foreign-owned" if it is state-owned and operates in a foreign country. We construct the "Bank health index" based on the following five factors: the share of liquid to total assets, the share of core deposits to assets, the share of total deposits to assets, the ROA (net income/total assets), and the share of equity to total assets. The factors considered are based on data availability and the indicators used in CAMELS (Capital adequacy, Assets, Management capability, Earnings, Liquidity, Sensitivity) rating systems to assess a bank's overall condition.

The basic characteristics of the sample are reported in Table 1. Almost 18% of the firms with access to a line of credit are banking with a state-owned bank. Banking with a foreign bank is more common and almost 47% of firms have access to a line of credit from a foreign bank. Conversely, less than 1% of the

> 1 Firms were interviewed in 2021 in Spain; in 2020 in Armenia, the Arab Republic of Egypt, and Tunisia; in 2019 in Albania, Azerbaijan, Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Georgia, Hungary, Italy, Jordan, Kazakhstan, Kosovo, Kyrgyz Republic, Latvia, Lebanon, Lithuania, Malta, Moldova, Mongolia, Montenegro, Morocco, North Macedonia, Poland, Portugal, Romania, the Russian Federation, Serbia, the Slovak Republic, Slovenia, Spain, Tajikistan, Türkiye, Ukraine, Uzbekistan, and the West Bank and Gaza; in 2018 in Belarus and Greece; and in 2017 in Argentina, Bolivia, Colombia, Ecuador, Paraguay, Peru, and Uruguay.

> 2 As a robustness test, we consider a continuous measure of state ownership and its quadratic term.

3