Debt Contract Enforcement and Product Innovation: Evidence from a Legal Reform in India

Abstract

We show that an increase in the efficiency of debt contract enforcement due to the introduction of debt recovery tribunals has a positive effect on product innovation in India. The increase in products is driven by larger firms with higher shares of tangible assets. These firms also experience an increase in secured borrowing and new long-term loans. Consistent with increased product innovation, these firms increase spending on research and development and enter into novel product lines that are new to the market. They also increase their spending on physical capital, compensation, advertising, and marketing.