projects undertaken by firms. As noted, Aryaggari et al (2006) find availability of finance from sources external to the firm to have a strong association with broader measures of firm innovation in developing countries. Jaumotte and Pain arrive at similar conclusions for growth in R&D stocks in OECD countries with respect to corporate profits (firm internal finance), credit to the private sector from financial institutions and stock market capitalization. Table 8 uses credit to the private sector as a rough indicator of financial sector development, indicating significantly lower financial depth in various of the middle income South East Asian economies than in the NIEs.

**Table 8.  National Innovation Systems and Business Environment – Selected Variables**

||Credit<br>Market<br>Depth<br>2000-<br>04(1)|<br>Starting<br>a<br>Business<br>(Days)<br>(2)|Average<br>Years of<br>Schooling<br>2000(3)|Researchers<br>per million<br>2003(4)|Quality of<br>Scientific<br>Research<br>Institutions<br>(5)|University-<br>Industry<br>Research<br>Collaboration<br>(5)|Intellectual<br>Property<br>Protection<br>(5)|Phone<br>Subscribers<br>per 1000<br>2003(6)|
|---|---|---|---|---|---|---|---|---|
|**East Asia (9)**|102|40|7.6|1375|4.5|4.1|4.3|878|
|NIEs|125|22|9.2|3165|5.2|4.7|5.1|1475|
|Hong Kong|153|11|9.5|1564|4.9|4.1|5.0|1640|
|Korea|98|22|10.5|3187|5.1|4.8|4.5|1240|
|Singapore|115|6|8.1|4745|5.5|5.0|6.1|1284|
|Taiwan, China|135|48|8.5|..|5.2|4.9|4.9|1735|
|SE Asia|75|66|6.6|210|4.1|3.6|3.8|398|
|Indonesia|20|151|4.7|207|3.9|3.4|3.2|127|
|Malaysia|141|30|7.9|299|5.0|4.7|5.1|642|
|Philippines|38|48|7.6|48|3.3|2.7|2.8|322|
|<br>Thailand|102|33|6.1|287|4.0|3.6|4.1|499|
|China|118|48|5.7|663|3.8|3.9|3.2|413|
|**High Income (21)**|112|20|9.5|3616|5.1|4.4|5.5|1392|
|Japan|100|31|9.7|5287|5.6|4.6|5.3|1151|
|USA|249|5|12.3|4484|6.4|5.7|6.4|1175|
|**Latin America (11)**|36|67|6.7|300|3.5|3.0|3.1|409|
|**Emerg. Europe (9)**|29|30|8.7|1503|4.0|3.1|3.3|850|

(1)Credit to Private Sector as % of GDP. (2) World Bank. Doing Business 2005. (3) Source: Barro and Lee (2000).

(4) UNESCO (2006). (5) Source: Global Competitiveness Report 2005. Index ranging from 1 (weakest) to 7 (strongest).

<u>(6) Fixed Line and Mobile subscribers per 1000 population. All regional data are simple averages.</u> Aghion, Angeletos, Banerjee and Manova (2005) emphasize that credit availability and financial development are particularly important when firms are in a volatile macroeconomic environment. Firms with significant credit constraints will be less able to overcome short term liquidity pressures during economic downturns, and so will undertake less long term R&D. Long term credit allows firms to look beyond cyclical and liquidity pressures to pursue longer term innovation. Panel data for OECD countries shows that the interaction term between financial development and volatility has a significantly positive impact on the ratio of R&D to total investment spending.

_Openness._ The earlier discussion of imports as a channel for technology transfer suggests that excessively restrictive trade policies can prove a significant barrier to international technology transfer. Preferential trading arrangements that create a bias against trade with R&D rich Northern economies will also tend to choke off knowledge transfers and spillovers, which (following the results of Schiff, Wang and Olarreaga, 2002) may be especially detrimental to the development of R&D intensive industries. Hoekman, Maskus and Saggi (2005) point out, 31