Contractual Implications of International Trade in Tacit Knowledge

published or not. The documents may come

Introduction

The transmission of tacit knowledge has some problems inherent to it that are not present in the transfer of other types of technology. These problems stem from the fact that it is uncodified knowledge, which allows neither contracts being written contingent on technology characteristics nor legal protection of technology. This characteristic causes moral hazard problems on both sides, first described in [START_REF] Arrow | Economic Welfare and the Allocation of Resources for Invention[END_REF]. Moral hazard problems are less acute in the case of codified, legally protected technology. On the one hand, codification implies that the relevant characteristics of the technology can be described, which allows the parties to write contracts contingent on them. On the other hand, legal protection against imitation dramatically limits potential moral hazard problems both on the licensor and on the licensee's side.

This paper studies the determinants of the transfer of patented technology and know-how and the role of the provision of technical assistance services in the transfer of tacit knowledge. The empirical analysis is carried out using a sample of technology-importing contracts signed by Spanish firms in 1991. One of the findings of the paper is that while contract duration has a positive effect on the probability of transmission of know-how in unaffiliated transfers, it has no effect on the probability of a patent being transferred. Contract duration is defined as the number of years the parties agree the relationship to last at the time of signing the contract. Another finding is that the provision of technical assistance eliminates the effect of contract duration on the likelihood of transferring know-how. It will be argued that this is consistent with technical assistance being used as a safeguard against the licensor behaving opportunistically.

The analysis of international technology transfer is important for its impact on productivity and growth, as found, at a macroeconomic level, in [START_REF] Attella | Do R&D expenditures really matter for TFP?[END_REF], [START_REF] Engelbrecht | International R&D spillovers amongst OECD economies[END_REF] or Frentzen (1998). Descending to a microeconomic level, although several studies, such as Anton and (1992,1994) or [START_REF] King | The sale of unprotected inventions under alternative models of contracting behavior[END_REF] analyze theoretically the transfer of unprotected technology, the empirical evidence on the actual licensing procedures is very scarce. Among the few studies using transaction-level data, [START_REF] Caves | The imperfect market for technology licenses[END_REF] summarize the difficulties faced when transferring technology, and [START_REF] Anand | The Structure of Licensing Contracts[END_REF] find inter-industry differences in contractual practices. [START_REF] Kim | Market structure and technology licensing: evidence from US manufacturing[END_REF] finds that the strength of intellectual property protection and prior licensing activity, among other factors, increase the propensity of US firms to license their technologies. [START_REF] Macho-Stadler | The role of information in licensing contract design[END_REF] and [START_REF] Mendi | The Structure of Payments in Technology Transfer Contracts: Evidence from Spain[END_REF] use the database employed in this article, although the focus in these articles is on explaining scheduled payments. Contract duration has not been the main object of theoretical or empirical studies on contracts for the international transmission of technology. The temporal dimension of the agreement has been typically overlooked in the literature, focusing on difficulties to contract due to asymmetric information or the risk inherent to the transmission of the technology, but never considering the case of the relationship lasting for several periods. Thus, one of the contributions of this paper is to explicitly consider the temporal dimension of contracts and to analyze whether contract duration varies with the type of technology to be transferred.

In this paper, contract duration is considered to be exogenous, and determined by how long will the technology be useful before its obsolescence. It is assumed that licensors sell different product and/or process technologies with different expected remaining useful lives. Once these useful lives expire, technologies become obsolete and therefore, worthless. These remaining useful lives at the time of contracting actually determine contract duration.

The estimated effect of contract duration also suggests that the transfer of know-how is much more difficult than that of patented technology. This way, duration affects the likelihood of know-how being transferred because longer contracts reduce the scope for moral hazard on both sides. Hence, if the relationship is scheduled to be short-lived, the temptation of the parties to breach the contract is F o r P e e r R e v i e w 3 greater than in the case of longer relationships (see [START_REF] Klein | Why hold-ups occur: The self-enforcing range of contractual relationships[END_REF]. Foreseeing this, the parties may be unable to sign an agreement in the first place, and therefore, the observed distribution of contract duration in those contracts that include the transmission of know-how will be skewed to the right.

Regarding the provision of technical assistance services to facilitate the transmission of tacit knowledge, [START_REF] Arora | Contracting for tacit knowledge: the provision of technical services in technology licensing contracts[END_REF] presents evidence of complementary inputs being bundled together with the transfer of know-how, arguing that they mitigate moral hazard on the licensor's side. In the presence of potential moral hazard problems on the licensor's side, technical assistance can be a safeguard against this opportunistic behavior. It can be regarded as commitment by the licensor to provide the licensee with the first-best level of technology, as long as providing technical assistance is costly to the licensor of the technology. [START_REF] Arora | Contracting for tacit knowledge: the provision of technical services in technology licensing contracts[END_REF] also finds that patents are bundled together with know-how, a result not found in the present paper.

However, a positive relationship between the transfer of know-how and the provision of technical assistance should be interpreted with caution, since, by the non-codifiability of know-how, the provision of technical assistance is the natural way to transfer tacit knowledge, independently of any moral hazard problems. The result obtained in this paper is that transfers of know-how, but not of patents, are associated with the provision of technical assistance. The additional result that technical assistance eliminates the effect of duration on the likelihood of transferring know-how constitutes further evidence consistent with technical assistance mitigating moral hazard problems on the licensor's side.

The organization of the paper is as follows. Section 2 discusses how contract duration may affect the transfer of know-how and why the parties may be interested in including technical assistance in the agreement. Section 3 describes the data, which will be analyzed in Section 4. Finally, Section 5 summarizes the main conclusions from the empirical analysis carried out in this paper.

Technology trade, contract duration, and the provision of technical assistance

This section discusses how the transfers of patented technology and of know-how are differently affected by moral hazard problems. Furthermore, it will be discussed how contract duration may alter the incentives of the parties to behave opportunistically. The hypotheses to be tested in the empirical section will also be presented.

Patented technology and know-how differ substantially in their tacitness. The former type of technology is codified knowledge, which allows for its description and delimitation of what is included and what is not included in the patent, and therefore, what is and what is not legally protected against imitation. Furthermore, the possibility of describing the object of a patent permits that contracts be written based on the characteristics of patented technology, since it is possible for third parties to verify these characteristics. By contrast, know-how is tacit, uncodified knowledge. This characteristic prevents the parties from writing contracts based on technology characteristics, which are non verifiable by third parties. This tacitness also impedes that know-how receive legal protection against imitation.

There is less room for potential moral hazard problems in the transfer of a patent than in the transfer of know-how. In the latter type of transfers, the licensee may renege on payments, and the licensor may provide a suboptimal type of technology, see for instance [START_REF] Choi | Technology transfer with moral hazard[END_REF]. If this threat is serious enough, in some cases the agreement might not be signed at all. In other cases, the parties will be forced to include safeguards in order to actually sign the contract.

In this paper, contract duration refers to what the parties expect the relationship to last given their information at the time of signing the contract. This will not always be equal to actual contract duration, since some contracts may be terminated early. Incentives to deviate from honest behavior differ with contract duration. If the parties sign a short-term contract, they have a smaller incentive to cooperate in the successful implementation of the technology than in the case of a longer relationship, since the opportunity cost of breaching the contract is greater the longer the remainder of the Of course, for this effect to exist, there must be some way the non-deviant can punish the deviating firm. In the case of the licensee deviating by reneging on its payments due, the licensor can license another firm, thus reducing the original licensee's profits, a reduction that will be increasing in contract duration. Similarly, if the licensor does not provide the first-best technology to the licensee so as to save in costs, the opportunity cost to the licensor is the fact that it is receiving lower revenues. This opportunity cost is also increasing in contract duration.

Legal protection of technology is crucial in determining how profitable contract breaching is, and thus, to analyze whether contract duration will have any effect at all in the likelihood of observing specific types of technology being transferred. If legal protection of the technology is strong, for instance in a patent licensing contract, the temptation to cheat is reduced. In this case, contract duration should not be a factor in determining how likely to be signed these contracts are, and therefore, its effect on the likelihood of observing the transfer of a patented technology should be null.

By contrast, this same argument suggests that the likelihood of know-how being transferred should be non-decreasing in contract duration. For some short-term contracts, opportunistic behavior by either party may prevent the parties from actually signing the contract. The incentives to not behaving opportunistically increase in contract duration, since the profit from continuous cooperation more likely exceed the instantaneous gain from deviation. This double prediction is precisely what will be tested in the empirical section. Using data from contracts for the imports of technology by Spanish firms in 1991, it will be analyzed whether contract duration affects the likelihood of observing a patent and know-how. If moral hazard inherent to the transfer of know-how is an issue, then duration should positively affect the likelihood of know-how but should have no effect in the transfer of a patent. However, evidence on the existence of such relationship cannot be regarded as a definitive proof of a direct causality effect of duration on the likelihood of transferring know-how, since the observed correlation could well be via a selection effect. Furthermore, the available data does not allow the empirical analysis from ruling out alternative explanations. Indeed, a positive effect of duration may just come from the fact that the transmission of know-how takes longer to be carried out.

Related to the problems inherent to the transfer of tacit knowledge, the provision of technical assistance can be a way to ensure that the licensor indeed supplies the first-best level of technology. In some sense, see [START_REF] Arora | The transfer of technological know-how to developing countries: technology licensing, tacit knowledge, and the acquisition of technological capability[END_REF][START_REF] Arora | Contracting for tacit knowledge: the provision of technical services in technology licensing contracts[END_REF], it acts as a commitment device, if the provision of technical assistance is costly to the licensor. What will be analyzed empirically is whether technical assistance is more likely to be present in transfers of know-how than of patents. Additionally, it will be tested whether or not contract duration affects differently the likelihood of including know-how, depending on the inclusion of technical assistance in the original agreement. If the provision of technical assistance indeed solves the moral hazard problems on the licensor's side, conditional on moral hazard problems on the licensee's side being relatively less important, then duration should not affect the likelihood of transferring know-how in contracts where technical assistance is included. By contrast, in those contracts where technical assistance is not included, contract duration should still have a positive effect on the probability of transferring tacit knowledge. Evidence for this effect will also be searched for in the empirical section.

The data

The dataset is obtained after examination of the records of the Spanish Ministry of Industry. All Spanish firms that imported technology were required, up to 1992, to report the terms of the technology purchase. The importer of the technology had to file a form, named 'TE-30', with the 'Servicio de Información y Transferencia de Tecnología' (Technology Transfer Office), a branch of the Spanish Ministry of Industry. In some cases, in addition to this form, the firm included the actual The Spanish firm, which was the licensee in all cases, had to describe in this form some features of the technology being purchased or licensed. First, the licensee reported whether that technology could be classified as a product and/or a process technology. The Spanish firm also indicated whether or not the agreement included a transfer of a patent, a utility model (a minor invention also legally protected), know-how, an industrial design or software. In some cases, the contract includes the transfer of several of these technology types. Out these types of technology, know-how is the only one that constitutes tacit knowledge, since the rest of them are codified and receive some legal protection against imitation, whereas legal protection is strongest in the case of a patent. In the same form, the Spanish firm also reported whether the contract was a licensing contract, where only the right to use a given technology was purchased, or it was an actual sale, where the Spanish firm acquired ownership of the technology. In the empirical analysis, all the variables constructed using these items will be dichotomous, taking values zero or one, since what is observed is the Spanish firm reporting whether or not the contract includes the transfer of these technological characteristics.

Regarding information on the Spanish firm, in addition to the industry of its main activity, it reported its sales in the year before the filing of the form. Also included was information on what kind of linkages licensor and licensee had, if any. The licensee, when applicable, had to report the percentage of its equity owned by the licensor, or if both firms had a common parent. Using this information, the observations can be classified into affiliated and unaffiliated. Two parties are affiliated if either there is a direct participation of the licensor of 50% or more in the licensee's equity or if both firms have a common parent. The Spanish firm also reported whether it performed R&D, although there was no information on the percentage of sales devoted to this activity. Regarding the licensor's characteristics, both its industry and country appear on the form. The form also contains a licensee's estimate of 8 scheduled payments to be made during the initial five years of the contract, distinguishing between fixed and variable payments. If the relationship was scheduled to last longer than five years, the licensee was not required to provide an estimate of payments. The impact of some characteristics of the transferred technology on payment schemes has been analyzed in [START_REF] Mendi | The Structure of Payments in Technology Transfer Contracts: Evidence from Spain[END_REF].

Whenever the contract is filed together with the form, more variables are observable, by inspection of the contract clauses. In particular, contracts stipulate the duration of the agreement, which is the number of years the parties expect the relationship to last at the time of signing the contract. Thus, for those observations where the contract was filed together with the form, the duration variable just takes the value specified in the contract. For some cases in which only the form was filed, duration can be inferred by observing in what period scheduled payments stopped. In these cases, duration is the last year for which positive payments were scheduled. There are some observations for which duration is neither observed nor inferred, making duration missing in 27 occasions.

Concerning the sampling process, the Spanish Ministry of Industry followed no systematic criterion in the classification of the forms. They were literally stored in boxes as they were received and sent to the archives in a basement located in the central offices of the ministry, in Madrid. This suggests that there was no significant bias arising from the sampling procedure, which was to randomly select boxes and inspecting the forms contained in them. The sample size is conditioned by the fact that the author obtained permission only for two weeks to copy the contents of the forms manually.

Out of the 5168 forms filed in 1991, which are described in [START_REF] Pérez | Metodología para el estudio de los procesos de transferencia de tecnología: aplicación al caso español[END_REF], the sample used in the empirical section of this paper includes 165 observations. 212 observations were collected with a clear technological content, since they specified the transfer of a patent, a utility model, an industrial F o r P e e r R e v i e w 9 design, know-how, or software (not for resale 1 ). This criterion leaves out of the sample contracts where the technological content is less clear, for instance those where the licensee is just a software retailer. In addition to the 27 missing values of the duration variable, sales are not reported in 22 cases. This means that, out of the mentioned 212 observations with a clear technological content, only 165 observations are used in the empirical analysis 2 .

Table 1 and 1b present selected characteristics of the contracts, classified by industry of the licensee. The data have been classified into five industry groups: Agriculture; Energy, Minerals, and Chemicals; Metal Transformation; Other Manufacturing and Construction; Services. These industry groups correspond to industries 0, 1-2, 3, 4-5, and 6-9 respectively, according to Spanish classification of industries (CNAE-74).

[Insert Tables 1a and1b here] As it can be seen in Table 1a, there is some variation across industries in technology characteristics. Most contracts made in Energy, Minerals and Chemicals include the transfer of knowhow, whereas less than half of the contracts in Services, Other Manufacturing, Construction, or Agriculture include the transmission of this type of technology. By contrast, the proportion of contracts that include the transfer of a patent is highest in Agriculture, and in the remainder industry groups, it is below one third. This stresses the fact that patented technology, which has received significant attention in the Economics literature, represents a relatively small part of the international market for technology. This result also holds when total payments in transfers including a patent and not including one are considered.

1 Included in the sample are transfers of software only if it is to be used by the licensee. There are some contracts in the sample where the licensee merely acts as a software retailer. These transfers have been explicitly excluded from the final sample. In this paper, a given technology is considered to be of a process type if the licensee classifies it as a process but not product technology.

Table 1b summarizes information on other variables also employed in the empirical analysis.

Unaffiliated transfers are prevalent in all industries, with Agriculture having the highest percentage, over 80%. This variable is also dichotomous, taking the value zero if unaffiliated, and one if the transfer is made between affiliated parties. The transfer of ownership is rarely observed in these contracts, less than 10% overall, implying that most contracts are indeed licensing contracts. Ownership is transferred about 15% of the times in Energy, Minerals, and Chemicals and in Metal Transformation, whereas in the remainder industries it is rarely transmitted. Duration, measured in years, is also highest in Agriculture, and in the neighborhood of five years in the case of the remaining industries, except for Services, which presents much shorter contracts on average. Finally, there is a high degree of heterogeneity across industries in the licensee's sales, measured in millions of Spanish pesetas with the average firm in Energy, Minerals and Chemicals being 20 times as big as the average firm in Agriculture.

In the empirical analysis, the logarithm of this variable will be used.

Empirical evidence

This section presents some empirical evidence drawn from the sample of contracts described in the previous section. First, evidence is presented on the relationship between know-how, patents, and technical assistance. Then, the factors that determine the transfers of patented technology as well as know-how are analyzed. Finally, evidence on the role of technical assistance in the transfer of tacit knowledge is presented. 2a, which crosstabulates indicators of the transfer of patents and know-how, shows that rarely is patented technology transferred together with tacit knowledge, only 17 out of 165 observations. The non-complementarity between these two types of technology is confirmed by the value of the Chi-squared test, which is statistically significant at the 5% level.

Tables 2b and 2c are aimed at providing evidence of whether technical assistance is likely to be bundled together with a particular type of technology. Table 2b presents the cross tabulation of knowhow and technical assistance. It is clear that the transfer of know-how dramatically increases the likelihood of technical assistance being included in the contract. This is confirmed by the value of the Chi-squared test, statistically significant at the 1% level. By contrast, analyzing the relationship between the transfer of patented technology and the provision of technical assistance, the result is the opposite: Table 2c shows that the transfer of patented technology reduces the likelihood of including technical assistance in the contract, with a Chi-squared statistic that is significant at the 1% level. Thus, technical assistance seems to be associated with the transfer of know-how, but not with that of a patent. This is consistent with the claim that the provision of technical assistance helps to mitigate potential moral hazard problems on the licensor's side, inducing it to transfer the first-best level of technology. However, this is not the only candidate explanation, since the relationship between know-how and technical assistance could also be due by the very non-codifiability of know-how. Indeed, technical assistance, which increases the direct contact between licensor and licensee, is the way the parties have to effectively transfer a kind of technology that is not codifiable.

> = > = i i i i V KnowHow V Patent
(2)

i.e. whether patented technology or know-how has been included in the contract.

Columns (i) and (ii) of Table 3 report estimated coefficients of the bivariate probit model using the full sample of contracts, whereas columns (iii) and (iv) report estimated coefficient using only unaffiliated contracts. The reason to consider the unaffiliated subsample isolately is that there might be significant differences between affiliated and unaffiliated transfers. Indeed, the literature typically assumes that moral hazard is less likely to be a problem in affiliated transfers. The regressors include four industry dummies, one for each industrial group except for Agriculture (Ind variables). Link is a dummy that takes the value 1 if the transfer is affiliated, and zero otherwise. Duration is contract duration in years. SameInd is a dummy that equals one if both parties to the contract are classified into 13 the same industry. A transfer between two firms in the same industry is assumed to suffer less from asymmetric information problems. The lnimpts variable is the logarithm of the percentage of total Spanish imports that came from the licensor's country of origin. It is a measure of asymmetric information both on the licensee and the licensor's side, since a low value of this variable suggests less commercial ties between Spain and the licensor's country, and thus less information about the conditions of the Spanish market. Additionally, a low value also suggests that the licensee has less information about the licensor. Finally, lnsales is the logarithm of sales of the Spanish firm in the year prior to the signing of the contract, which had to be reported in the form. This controls for potential differences between large and small firms in the type of technology that they acquire. For instance, if the market value of patents is too high then maybe only large firms, which are assumed to be less cash constrained, will be able to purchase patented technology.

None of the coefficients reported in column (i) of Table 3 is statistically significant, except that on process technology, which is negative. Thus, most patented technology refers to new products rather than improvements in the production of existing products. Neither affiliation nor contract duration seem to affect the probability of patented technology being transferred, suggesting that the legal protection that a patent receives is strong enough to mitigate possible moral hazard problems on both sides.

By contrast, affiliation, process and the indicator of licensor and licensee belonging to the same industry have positive, statistically significant effects in the likelihood of transferring know-how, as seen in column (ii). The affiliation variable is indeed significant at the 1% level, suggesting a strong relationship between affiliation and the transfer of know-how: internal transfers seem to be preferred for the transmission of this type of technology. Duration has no statistically significant effect on the likelihood of transferring know-how. The coefficients on the industry dummies, which are unreported, The fact that there may be significant differences between affiliated and unaffiliated transfers in the type of technology to be transferred suggests the separate analysis of unaffiliated contracts, which is done in columns (iii) and (iv) of Table 3. Using the subsample of unaffiliated transfers, the effects of the different regressors on the likelihood of transferring a patent are similar to those in column (i).

Besides the coefficient on process technology, which is negative, highly statistically significant but smaller in absolute value than that in column (i), no coefficient is statistically significant. In particular, duration does not appear to affect the likelihood of a patent being transferred. Concerning the reported estimated coefficients in column (iv), which measures the impact of the regressors on the transfer of know-how, those on process and same industry are positive and statistically significant, as they were in column (ii) and now they are slightly greater in absolute value. The main difference is that now the coefficient on duration is positive and statistically significant at the 1% level, suggesting that unaffiliated contracts that stipulate know-how are significantly longer than those that do not include the transfer of tacit knowledge. This relationship is consistent with duration reducing the licensor and licensee's incentives to behave opportunistically, as discussed in the previous section. Also, the fact that the effect appears only in unaffiliated transfers is consistent with this explanation, since moral hazard problems are more acute in arm's-length transfers. However, there are other explanations consistent with this finding, such as the transfer of tacit knowledge, especially to an unaffiliated party, requiring more time than that of codified knowledge.

Additionally, if the parties belong to the same industry, it is more likely that they agree on the transfer of know-how, with the coefficient on this variable in column (iv) being positive, statistically significant, and greater in absolute value that that reported in column (ii). By its very nature, tacit knowledge requires the licensee to be familiar with the procedures that know-how applies to, in a lesser 15 degree than in the case of a patent, where a description of it is available. This could explain the positive relationship between the licensor and the licensee belonging to the same industry and the transfer of know-how, as well as the insignificant effect on the transfer of a patent.

The provision of technical assistance services

Table 4 presents results of regressions that inquire into whether technical assistance is actually bundled together with know-how in order to mitigate moral hazard problems on the licensor's side, as proposed in [START_REF] Arora | Contracting for tacit knowledge: the provision of technical services in technology licensing contracts[END_REF]. For that purpose, it will be analyzed if technical assistance eliminates the effect of duration on the likelihood of transferring patented technology and know-how, within unaffiliated transfers. The evidence suggests that technical assistance actually helps in the transmission of know-how, but has no effect if a patent is to be transferred.

First, column (i) in Table 4 presents estimated marginal effects of a Probit specification where the dependent variable is an indicator of the transfer of a patent, and the regressors are the same as in the case of equation ( 1), except for the absence of the affiliation variable, since only the unaffiliated subsample will be used, and of industry dummies, because of the low number of observations due to the additional splitting of the sample into contracts which include technical assistance and contracts which do not include it. In column (i) only observations where the contract does not stipulate the provision of technical assistance are used, and no effect is statistically significant, except for that of the technology being of a process type. On the other hand, column (ii) uses observations where the technical assistance services are provided by the licensor. In this case, duration has a positive marginal effect, and becomes statistically significant at the 10% level. If moral hazard on the licensor's side was a major factor driving the likelihood of patented technology being transferred and technical assistance helps mitigating this problem, then the effect of duration should have been positive if no technical assistance services are provided, and null if technical assistance is provided. Columns (iii) and (iv) do the same exercise but now the dependent variable is, in both cases, an indicator of the transmission of know-how. Now the difference between the estimated marginal effects of duration in columns (iii) and (iv) provides additional evidence consistent with technical assistance helping to mitigate moral hazard problems on the licensor's side. If no technical assistance is provided, the effect of duration is relatively large, increasing the likelihood of know-how being transferred by 7.7% per year of duration of the contract, and statistically significant at the 1% level. By contrast, in the subsample of unaffiliated transfers where technical assistance is provided, the effect of duration is much smaller in absolute value, and loses its statistical significance. Thus, in contracts that stipulate the provision of technical assistance, contract duration is less relevant in determining the likelihood of signing the contract, suggesting that the provision of technical assistance is a partial solution to moral hazard on the licensor's side. It is interesting to stress the asymmetry of this result comparing transfers of codified technology with tacit knowledge: technical assistance only helps in the case of tacit knowledge, which again suggests that moral hazard problems on the licensor's side indeed affect the likelihood of signing the contract.

Additionally, the transmission of technical assistance also makes the effect of the same industry variable less important, although it remains positive and statistically significant. An interpretation of this result is that technical assistance substitutes for lack of knowledge about the usual procedure in a different industry. The effect of the logarithm of imports variable is positive, statistically significant, and it is not influenced by the transmission of technical assistance: know-how tends to be acquired from countries with closer commercial ties with Spain regardless to the efforts made by the parties to reduce moral hazard on the licensor's side. This again is consistent with asymmetric information on variables other than technology characteristics worsening moral hazard problems on both sides.

Finally, the provision of technical assistance dramatically changes the effect of the licensee's size, switching from it being positive and statistically significant at the 5% level to negative and 17 statistically significant at the 1% level. A candidate explanation is that when no technical assistance is provided, mostly larger firms acquire tacit knowledge because they can more easily bear the loss from possible moral hazard on the licensor's side, and thus, the likelihood of the contract actually being signed is smaller if the licensee is of a smaller size. On the other hand, if technical assistance is provided, then there is less room for opportunistic behavior on the licensor's side, and thus, the true distribution of licensees' sizes appears, with smaller firms more likely acquiring tacit knowledge. An alternative explanation is that small firms lack the resources to maintain a permanent technical staff, making them more dependent on technical assistance provided by the licensor.

Conclusions

This paper analyzes the determinants of the transmission of patented and of tacit technology, with an emphasis on the effect of contract duration and on the role of the inclusion of technical assistance. With this purpose, a sample of 165 contracts for the acquisition of technology by Spanish firms from foreign sources in 1991 is analyzed empirically.

The analysis of the sample presents evidence of the positive effect of contract duration on the probability of transferring tacit knowledge in unaffiliated transactions. By contrast, duration has no effect if patented knowledge is to be transferred, regardless of the linkages between licensor and licensee. An explanation for the difference between the two effects could be the legal protection that a patent receives, which is absent if tacit knowledge is to be transferred. This constitutes a potential source of moral hazard problems on the licensee's side. Additionally, the fact that tacit knowledge is uncodified may be an additional source of moral hazard problems on the licensor's side. If the parties sign a long-term contract, then moral hazard problems are less acute because the opportunity cost of opportunistic behavior increases. Since the legal protection and codification of a patent reduce the temptation to cheat, duration has no effect in this type of transfers, but the transfer of know-how, In addition to the previous argument, the positive effect of contract duration on the likelihood of transferring know-how could also work by means of an increase in the likelihood of the parties actually signing the contract if duration is long. If know-how is to be transferred and the expected duration of the technology is short, then the potential moral hazard problems on both sides may be so acute that the parties are not able to reach a successful agreement. The fact that duration affects the likelihood of observing the transfer of know-how only within unaffiliated transfers suggests that the problems associated with its transmission may be an important determinant in the successful transfer of tacit knowledge.

The paper also investigates whether the parties include the provision of technical assistance as a way to solve moral hazard problems on the licensor's side. Technical assistance can be seen as a commitment by the licensor to provide the licensee with the first-best level of technology, if contracting upon technological characteristics is impossible. The evidence presented in Tables 2 and4 is consistent with the claim that these services are indeed used by the parties for this purpose: technical assistance is associated with the transfer of know-how, but not of a patent, and the provision of technical assistance services makes the effect of contract duration in the likelihood of transferring know-how be statistically insignificant.

The evidence presented in this paper is, therefore, consistent with opportunistic behavior being an important determinant of international transfers of technology. However, the data that is available prevent this evidence from being fully conclusive, since there could be other explanations for the results in Tables 2 and3 not based on the interpretation proposed in this paper. However, the results presented in The results obtained in this paper suggest that the legal protection offered by the patent system in Spain in 1991 was sufficient to ensure that two unaffiliated parties interested in transferring ownership or the right to use a patent were not refrained by potential moral hazard problems. By contrast, the transfer of know-how was much more difficult because of its lack of legal protection and its tacitness. Technical assistance services are introduced as a partial solution to this problem, but whenever this service was not provided, the probability of transferring know-how depended on factors such as contract duration, which determined how acute moral hazard problems were to be. Moreover, it was precisely smaller firms the most likely to forgo the possibility of acquiring tacit knowledge.

Finally, the results obtained in this paper should also induce models that analyze contracts for the transfer of technology to explicitly consider its temporal dimension.

  this was optional. This type of control is no longer allowed by the European Union, and thus filing was terminated in 1992.

2

  In two cases, neither duration nor sales were observed. technical assistance services is more frequent in Metal Transformation and Services, and rarely observed in Agriculture and Other Manufacturing and Construction. On the other hand, process technologies are prevalent in Services, and no contract in Agriculture fall into this category.

  of patents, know-how, and provision of technical assistance servicesTables2a, 2b, and 2c are cross tabulations of the indicators of the transfer of a patent, the transfer of know-how, and the provision of technical assistance services. First, Table

  in both equations. The logarithm of imports and logarithm of sales variables have statistically insignificant effect on the likelihood of transferring either a patent or know-how.

  features, is sensitive to duration, which changes the parties' incentives to breach the contract.

. Determinants of the transfer of patents and know-how

  Table 4 will present further evidence on the role of technical assistance in the transfer of tacit knowledge.Table 3 presents estimated coefficients in a bivariate Probit model where the dependent variables are indicators of the transfer of patented technology and of know-how. This model allows for the error terms in both equations to be correlated. The evidence presented in Table 2a indeed suggests that such correlation should be taken into account. The specification whose coefficients are estimated is

				Submitted Manuscript	Page 12 of 26
	4.2the following:
	1 V i 2 V i	= =	F o r 6 5 6 5 i Pcs Link + + i Pcs Link + + P i + i + e 7 7 Duration Duration i i e The vector of error terms is distributed 4 1 , 0 j i j j Ind + = 4 1 , 0 j i j j Ind + = N	+ + 0 0	8 8 Sameind Sameind 1 1 ,	i i	2 1 , , , and the observed dichotomous 10 9 10 9 ln ln i i i sales impts + + + (1) ln ln i i i sales impts + + +
	dependent variables are simply,	r
				( 1	v ) 0 e , 2 R ( 1 ) 0 , 1
							i e
							w
								12
			Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK

Table 4

 4 , indicating the different role of technical assistance depending on the technology additional evidence in favor of the explanation proposed in this paper. It would be interesting to study whether this result is also found in other similar datasets.

	type, constitutes
	F o r
	P e e
	r
	R e v
	i e
	w
	19

Table 1a . Contract and firm characteristics by industry

 1a

	Industry	Total Know-how Patented technology	Technical assistance	Process technology
		Obs.	%	%	%	%
	Agriculture (0)	5	40.0	40.0	20.0	0.0
	Energy, Minerals, Chemicals (1-2)	41	85.4	29.3	51.2	51.2
	Metal Transformation (3)	58	65.5	27.6	56.9	43.1
	Other Manufacturing, Construction (4-5)	29	42.3	20.7	24.1	44.8
	Services (6-9)	32	40.6	6.3	56.3	78.1
	Total	165	61.8	23.0	48.5	50.9
	F o r F o r F o r
	P e e P e e P e e
		r r r
		R e v R e v R e v
			i e i e i e
			w w w
						20 22

To the best of my knowledge, all papers in this field consider instantaneous transfers of technology and analyze how moral hazard, asymmetric information, or risk-sharing influence scheduled payments or the inclusion of certain contract clauses. The fact that contracts differ in their durations has been overlooked in the literature, and in my opinion, deserves more attention.

Table 1b . Contract and firm characteristics by industry

 1b

	Page 23 of 26	Submitted Manuscript
	F o r
	Industry Energy, Minerals, Chemicals (1-2) Agriculture (0) P e e Unaffiliated Ownership % % 80.0 0.0 70.7 17.1 Metal Transformation (3) 69.0 15.5 r	Duration years 7.6 4.8 4.7	Average sales (pta mn) 1260 26992 23799
	Other Manufacturing, Construction (4-5) Services (6-9) Total	58.6 71.9 68.5 R e v	3.4 3.2 10.9	4.7 2.7 4.4	6210 24208 20897
			i e
			w
						23

Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK

Table 2a . Transfers of know-how and patented technology

 2a

		No patent	Patent	Total
	No know-how	42	21	63
	Know-how	85	17	102
	Total	127	38	165
	Pearson Chi-square			6.103
	Probability			0.013

Table 2b . Transfers of know-how and technical assistance No technical assistance Technical assistance

 2b

			Total
	No know-how	44	19	63
	Know-how	41	61	102
	Total	85	80	165
	Pearson Chi-square Probability		13.703 0.000

Table 2c . Transfers of patented technology and technical assistance No technical assistance Technical assistance

 2c

		Submitted Manuscript			Page 24 of 26
	F o r
	P e e
		r
		R e v	Total
		i e
	No patent Patent	57 28	70 10 w	127 38
	Total	85	80		165
	Pearson Chi-square				9.714
	Probability				0.000
					24

Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK

Table 3 . Bivariate Probit of transfer of patented technology and know-how

 3 All regressions include industry dummies. Standard errors reported below the estimated coefficient. * indicates statistically significant at the 90% level (two-tailed test). ** indicates statistically significant at the 95% level (two-tailed test). *** indicates statistically significant at the 99% level (two-tailed test).

	Page 25 of 26	Submitted Manuscript
		Full sample		Unaffiliated subsample
		Patent	Know-how		Patent		Know-how
		(i)	(ii)		(iii)		(iv)
	Affiliation	0.19 0.254	0.763 *** 0.249
	Process	-0.937 ***	0.451	*	-0.651	**	0.581	*
		0.249	0.238		0.357		0.311
	Duration	-0.028 0.034	0.029 0.033		0.004 0.046		0.127 *** 0.046
	Same industry	-0.089	0.425	*	-0.014		0.668	**
		0.255	0.245		0.315		0.304
	ln(imports)	-0.052 0.119	0.079 0.107		-0.001 0.134		0.132 0.125
	ln(sales)	0.054	-0.066		0.062		-0.037
		0.546	0.051		0.062		0.059
	Constant	-0.228 0.8	-0.656 0.784		-0.393 0.975		-2.25 0.964	**
	Log-likelihood		-159.858				-108.161
	Sample size		165				113

Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK

Table 4 . Technical assistance as a safeguard against opportunistic behavior

 4

		Patented technology			Know-how
		No technical assistance	Technical assistance		No technical assistance	Technical assistance
		(i)		(ii)		(iii)		(iv)
	Process	-0.278 0.12	**	-0.031 0.099		0.36 0.141	**	-0.113 0.167
	Duration	0.001		0.022	*	0.077 ***	0.024
		0.019		0.012		0.027		0.022
	Same industry	-0.001 0.126		0.038 0.096		0.418 *** 0.127	0.281 0.165	*
	ln(imports)	-0.007		0.022		0.134	*	0.135	*
		0.056		0.044		0.072		0.067
	ln(sales)	0.027 0.025		0.022 0.019		0.078 0.035	**	-0.086 *** 0.032

Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UKSubmitted Manuscript

Acknowledgement

I thank the anonymous referee for his helpful comments. Financial support from the Spanish Ministry of Science and Technology (SEC2002-01839) is gratefully acknowledged. All errors are my own.

Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK

Submitted Manuscript


G21 -Banks|Other Depository Institutions|Mortgages < G2 -Financial Institutions and Services < G -Financial Economics, G32 -Financing Policy|Capital

This paper investigates the influence of cash flow on corporate investment in eleven OECD countries. We find that the sensitivity of investment levels to internally available funds differs significantly across countries, and is lower in countries with predominantly close bank-firm relationships than in countries with predominantly arm's-length bank-firm relationships. At the same time, we find no relationship of the levels of financial constraints to indicators of overall financial development. Our results are consistent with the view that information and incentive problems in the capital market have important effects on corporate investment, and that close bankfirm relationships can reduce these problems and thus improve the access of firms to external finance.

Introduction

Companies in various countries operate under dramatically different financial systems. The differences in the level of development of financial systems (as reflected, for example, in the volume of credit relative to gross domestic product (GDP) and the relative stock market capitalization relative to GDP), in patterns of relationships of owners and managers, of firms and creditors, the level of activity of the market for corporate control are well documented. Do these differences influence the investment patterns of firms in these countries?

In a perfect capital market, funds will always be available to firms with positive net present value investment opportunities. However, economic theories suggest that market frictions such as information asymmetries and incentive problems may make external capital more costly for firms, and firms with profitable investment opportunities may not always obtain necessary capital. This implies that financial factors, such as the volume of internally generated funds and the availability of new debt and equity, determine the firms' investment decisions. There is now a large empirical literature that investigates the influence of the availability of external funds on corporate investment decisions (see e.g. [START_REF] Fazzari | Financial constraints and corporate investment[END_REF], [START_REF] Hoshi | Corporate structure, liquidity, and investment: evidence from Japanese industrial groups[END_REF], [START_REF] Chapman | Cash flow constraints and firms' investment behaviour[END_REF], [START_REF] Samuel | The investment decision: a re-examination of competing theories using panel data[END_REF]). Most studies find that financial variables such as cash flow help to explain investment levels of firms. This finding is interpreted as suggesting that firms are constrained in their investment by availability of external funds.

Many models emphasize that well-functioning financial intermediaries and markets ameliorate information asymmetries and transaction costs, mitigate risks and thereby mobilize savings for investment in longer-term and higher-return projects and foster efficient resource allocation (see the review by [START_REF] Levine | Financial development and economic growth: views and agenda[END_REF]). We thus may Several authors have suggested that establishing close relationship between firms and financial institutions mitigates financial market frictions still further. Thus, given the level of development of a financial system, firms with close ties to financial institutions should have a lower cost of capital and greater availability of funds relative to firms without such ties. A number of studies have found that firm-creditor relationships indeed improve the access of firms to external finance. We may therefore expect that firms in countries where close bank-firm relationships predominate to be less financially constrained than firms in countries where arm'slength bank-firm relationships predominate.

A number of studies undertaking cross-country comparisons of investmentcash flow sensitivity suggest that the effects of these characteristics of financial systems may indeed be important. Thus, the literature finds that investment is more sensitive to cash flow in the USA than in France [START_REF] Mulkay | Firm level investment and R&D in France and the United States: A comparison[END_REF], in the UK than in Germany [START_REF] Bond | Investment, R&D and financial constraints in Britain and Germany[END_REF], and in the UK than in Belgium, France and Germany [START_REF] Bond | Financial Factors and investment in Belgium, France, Germany and the UK: a comparison using company panel data[END_REF]. The authors of the last two papers argue that these differences are likely to be caused by differences in financial systems. Two or four countries, of course, may differ in many aspects of financial systems, and may also differ on other factors influencing investment decisions of firms. It is difficult to draw strong inferences about the effects of financial systems from the results of the papers mentioned. Such inferences would require a direct econometric analysis of a relationship between the indicators of financial systems and the indicators of financial constraints on investment, on a larger sample of countries. Two studies undertake such an investigation. [START_REF] Demirguc-Kunt | Law, finance and firm growth[END_REF], for large samples of 4 firms in 26 countries, calculate the proportion of firms in a country that were growing faster than they could have using only internally generated funds. They show that this proportion is positively related to financial development. As Love (2001) notes, this analysis says little about the efficiency of fund allocation: it is unclear whether the firms that grew at a higher rate were the ones with the best investment opportunities. Love (2001), for a sample of firms from 40 countries, establishes that firms in countries with more developed financial systems are less financially constrained. Her analysis, however, has some technical problems which could have lead to biased results. Neither study investigates the influence of the character of investor-firm relationship on investment decisions.

This paper aims at investigating whether differences in financial systems (both in financial development and in the character of investor-firm relationship) affect the financial constraints the firms face. We construct a panel dataset for manufacturing firms in eleven developed countries 1 and use it to estimate to what extent investment levels of firms in different countries are sensitive to the availability of internal funds.

We then investigate whether differences in these sensitivities are related to the characteristics of financial systems of the countries.

The rest of the paper is organized as follows. The theoretical arguments suggesting the directions of influence of financial systems on the availability of external finance for firms are discussed in Section 2, and the relevant empirical literature is discussed in Section 3. Section 4 discusses methodology and data, and Section 5 presents the results of the analysis. Section 6 concludes.

Theory

From the perspective of the neoclassical theory, as the famous analysis by [START_REF] Modigliani | The cost of capital, corporation finance and the theory of investment[END_REF] Most important among capital market imperfections are the problems of asymmetric information. [START_REF] Myers | Corporate finance and investment decisions when firms have information that investors do not have[END_REF] show that if managers are better informed than investors about the firm's prospects, the firm's risky securities will sometimes be underpriced, thereby raising the costs of external finance. [START_REF] Jensen | Theory of the firm, managerial behavior, agency costs and ownership structure[END_REF] argue that interests of owners diverge in several important ways from interests of creditors: owners prefer riskier projects, have an incentive to issue a new debt senior to the existing one (thus increasing the risk for existing creditors), when a risk of bankruptcy is present, have an incentive to expropriate assets from the firm, and in bankrupt states have no incentive to apply efforts to improve the returns. These incentive problems raise the cost of credit.

The literature thus suggests that, because of information and incentive problems, external finance is more expensive than internal funds. Firms therefore may face financing constraints, which means that financial factors, such as the volume of internally generated funds and the availability of new debt and equity, will influence the firms' investment decisions.

More developed financial systems are likely to increase the availability and reduce the cost of capital for firms (see the review by [START_REF] Levine | Financial development and economic growth: views and agenda[END_REF]). Financial intermediaries and securities markets provide vehicles for trading, pooling, and diversifying risks, and thus mitigate the risks associated with individual firms, industries, regions, countries, etc., and induce a portfolio shift towards projects with higher expected return. Financial intermediaries allow individuals to economize on F o r P e e r R e v i e w 6 the costs of acquiring and processing information about investments. This facilitates the acquisition and processing of information, allows better selection of the most promising projects, and thereby improves resource allocation. Financial intermediaries also allow to pool, and thus economize on, monitoring costs. Stock markets facilitate the acquisition and dissemination of information about firms. By linking managerial compensation to stock prices owners can align the interests of managers with theirs. Developed stock markets facilitate the functioning of the market for corporate control, which further aligns the interests of managers with those of the owners. All this increases the incentives of individuals to invest in riskier projects with higher return and in long-term projects, and facilitates the mobilization of individual savings for investment in such projects. We therefore expect firms in countries with more developed financial systems to be less financially constrained than firms in countries with less developed financial systems.

Close bank-firm relationships are likely to increase the availability and reduce the cost of capital for firms. "Through close and continued interaction, a firm may provide a lender with a sufficient information about, and a voice in, the firm's affairs so as to lower the cost and increase the availability of credit" (Petersen and Rajan, 1994, p. 5). The amount of this information, and the strength of this 'voice', are even larger if lenders also own equity stakes in firms, as is the case in countries such as Germany and Japan.

Close relationship may facilitate provision of capital to firms in financial distress but with viable prospects. A bank may provide capital to such a firm, if it repays to the bank when the firm's financial conditions improve. But such a firm has an incentive to renege on such an agreement, and thus cannot credibly commit itself [START_REF] Mayer | New issues in corporate finance[END_REF].

Under close bank-firm relationships both parties have a better understanding of each other, monitoring costs are reduced [START_REF] Lehmann | Do lending relationships matter? Evidence from bank survey data in Germany[END_REF].

Contracts can be renegotiated at a lower cost [START_REF] Sako | Prices, Quality and Trust: Inter-Firm Relations in Britain and Japan[END_REF][START_REF] Elsas | Is relationship lending special? Evidence from credit file data in Germany[END_REF].

If a bank is both a creditor and a shareholder of a firm, the firm has less incentive to take actions that benefit one class of investors at the expense of another (Aoki, 1984), and conflicts that arise among investors when a firm is near default are reduced [START_REF] Hoshi | Corporate structure, liquidity, and investment: evidence from Japanese industrial groups[END_REF]. During periods of tight money, a bank is less likely to sharply increase interest rates to firms with which it has close relationships to firms the relationships with which are arm's-length (Congigliani e.a., 1997). Finally, a bank's involvement with a firm signals the firm's creditworthiness to other investors [START_REF] Audretsch | Does firm size matter? Evidence on the impact of liquidity constraints on firm investment behaviour in Germany[END_REF].

To summarize, the theory predicts that close banking ties are likely to increase availability and decrease the cost of capital to firms. We would therefore expect firms in countries where close bank-firm relationships predominate to be less financially constrained than firms in countries where arm's-length bank-firm relationships predominate.

Related empirical literature

Our paper is related to several strands of recent empirical literature. Two papers analyse whether firms with close bank relationships face weaker financial constraints on investment. [START_REF] Hoshi | Corporate structure, liquidity, and investment: evidence from Japanese industrial groups[END_REF] find this to be the case for Japanese firms, and Audretsch and Elston (1999) -for German firms. Becht and Ramirez (2003) show that in the pre-World War I period German the firms in mining and steel industries that were not affiliated with one of the large universal banks were F o r P e e r R e v i e w 8 financially constrained, while this was not the case for firms affiliated with banks. [START_REF] Houston | Do relationships have limits? Banking relationships, financial constraints, and investment[END_REF] find that, among 250 large US firms, those with a relationship with a single bank are less financially constrained, provided that the investment is not too large (less than 100 percent of capital stock), but firms requiring larger investments are more constrained when they have a single bank. It is important to note, though, that a relationship with a single bank would not necessarily be 'close'.

Several other papers establish that close bank-firm relationships increase availability and reduce the costs of debt finance to firms. [START_REF] Petersen | The benefits of lending relationships: evidence from small business data[END_REF] argue that trade credit is the most expensive external source of finance, and so firms that use trade credit more are likely to be debt-constrained. For a sample of about 3400 US enterprises with fewer than 500 employees, they find that the extent of trade credit usage is negatively related to the duration of existing lending relationships.

Petersen and Rajan find that interest rates charged by banks are not related to the duration of lending relationships. This result is confirmed by [START_REF] Blackwell | Banking relationships and the effect of monitoring on loan pricing[END_REF] who use records of bank loans to small and medium enterprises; the authors show, however, that interest rates are lower when loan commitments from the bank represent a larger fraction of the firm's total debt. [START_REF] Berger | Relationship lending and lines of credit in small business finance[END_REF], using the same dataset as [START_REF] Petersen | The benefits of lending relationships: evidence from small business data[END_REF], find that firms with longer lending relationships have to pledge collateral less frequently and have to pay lower interest rates on loan commitments. Weinstein and Yafeh (1994) find that small Japanese firms with close bank relationships are more capital-intensive, indicating weaker financial constraints on investment. For German SMEs, [START_REF] Harhoff | Lending relationships in Germany -Empirical evidence from survey data[END_REF] and [START_REF] Lehmann | Do lending relationships matter? Evidence from bank survey data in Germany[END_REF] find that 'house banks' provide credit more readily and at lower interest rates, and [START_REF] Elsas | Is relationship lending special? Evidence from credit file data in Germany[END_REF] banks' provide liquidity insurance in situations of unexpected deterioration of borrower rating (although they do not find evidence that 'house banks' charge lower interest rates). For Japan, [START_REF] Hoshi | The role of banks in reducing the costs of financial distress in Japan[END_REF] find that firms with strong ties to the 'main bank' are more able to invest when they are financially distressed. For Italy, recent work shows that credit access increases with the exclusiveness and duration of the relationship between a firm and a bank (see the review in [START_REF] Foglia | Multiple bank relationships and the fragility of corporate borrowers[END_REF][START_REF] D'auria | Bank interest rates and credit relationships in Italy[END_REF] find that the closeness of lending relationship, measured by a bank's share of the customer's debt, is the main determinants of individual loan rates for large and medium firms, with large shares associated with lower interest rates.

The literature also suggests that firms in countries with more developed financial systems (as measured by the volume of credit and the relative stock market capitalization, relative to GDP) are less financially constrained. [START_REF] Rajan | Financial dependence and growth[END_REF], for a sample of 49 countries, find that manufacturing industries with higher external capital requirements grow faster in countries with higher financial development. [START_REF] Demirguc-Kunt | Law, finance and firm growth[END_REF], for a sample of firms in 26 countries, calculate the proportion of firms in a country that were growing faster than they could have using only internally generated funds. They show that this proportion is positively related to financial development. Love (2001), for a sample of firms from 40 countries, establishes that firms in countries with more developed financial systems are less financially constrained. Love conducts two kinds of tests. First, she estimates a model on the sample pooling all countries, including the interaction term of cash variable with country-level indicators of financial development. This test is problematic, however, because the assumption that the influence of other factors influencing investment decisions is similar across countries is questionable. Second, she estimates regressions for individual countries, and regresses the cash coefficients test is also the one we conduct in this paper. We have, however, refrained from using the coefficients obtained by Love, and decided to construct our own dataset and conduct our own estimations. There are two reasons for this. First, contrary to all other authors, Love uses a sample of all non-financial firms and not just manufacturing firms. The investment behaviour of non-manufacturing firms may differ significantly from that described in traditional investment models (see e.g. Whited, 1992), as Love herself admits 2 . Second, there are econometric problems involved in Love's analysis. The author uses the Generalized Method of Moments (GMM) for estimation on the panel data with often very few firms (less than 100 firms for 20 out of 40 countries). [START_REF] Mulkay | Firm level investment and R&D in France and the United States: A comparison[END_REF], for samples of firms from France and the US, find that instruments usually used in estimations of investment equations (and used by Love) are very weak in their case. Recently the evidence has accumulated that the use of GMM where only weak instruments are available produces very imprecise estimates of coefficients, which are also possibly biased when the sample size is not very large (less than about 500 units) (see [START_REF] Mulkay | Firm level investment and R&D in France and the United States: A comparison[END_REF] and references therein). As Mulkay et al. note, "this feature of GMM is especially problematic for comparative purposes because it implies that we will accept similarity of behavior between countries… when it is not present" (p. 3). It is suggestive that only 9 out of 40 cash coefficients in Love's estimations for individual countries are significantly different from zero at conventional levels. For countries in our sample, only one is significantly different from zero. It is likely that the weakness of instruments and the resulting imprecision of estimates are responsible for this result. In any case, it would be inappropriate for us to make inferences about cross-F o r P e e r R e v i e w country differences on the basis of coefficient all but one of which do not differ significantly from zero (and, in most cases, from each other) and are possibly biased.

There are other papers comparing the investment-cash flow sensitivity of firms across countries. [START_REF] Bond | Investment, R&D and financial constraints in Britain and Germany[END_REF] find that this sensitivity is higher for British than for German firms, [START_REF] Bond | Financial Factors and investment in Belgium, France, Germany and the UK: a comparison using company panel data[END_REF] -that it is higher for British than for Belgian, French and German firms, and [START_REF] Mulkay | Firm level investment and R&D in France and the United States: A comparison[END_REF] -that it is higher for the US than for French firms.

Methodology and data

We use the following methodology to analyse the effect of financial systems on the sensitivity of corporate investment to the availability of internal funds. First, we estimate the sensitivity of investment level to cash flow for firms in each country.

We then regress the coefficients estimated in these regressions on variables reflecting the character of financial systems in these countries 3 .

The econometric model we estimate in the first step is based on the q-theory framework. Absent capital market imperfections, the value-maximizing firm will invest as long as the shadow value of an additional unit of capital, marginal Tobin's q, exceeds unity. q thus represents the market's evaluation of the firm's investment opportunities. In the absence of capital market imperfections, cash flow should be irrelevant. A finding that cash flow does matter for investment levels, given q, is taken as evidence of a financial constraint. Since marginal q is not observable, researchers have used average q in their estimations.

In the first step we run the following regression: Here I t is the firm's capital expenditures during the year. K t is the stock of capital at the current replacement cost at the beginning of the year. To calculate it, we use a standard perpetual inventory method: K t =(1-)K t-1 + I t , where is depreciation rate. The starting value was based on the net book value of plant, property and equipment in the first year for which the data for the firm are available. The rate of depreciation was assumed to equal 8%, and the price indices were obtained using the GDP deflator from IMF (2001). Q t is market-to-book value at the beginning of the year, which controls for the attractiveness of investment opportunities. S t are sales during the years, included to control for the accelerator effect. Finally, our measure of liquidity is CF t , cash flow generated during the period, obtained as net income before dividends plus depreciation, depletion and amortization allowances.

We control for the effects of business cycles by including year dummies. We control for firm-specific effects by employing the within estimator: all variables employed in the regressions are differences from the mean value for a given firm.

All firm-level data come from the Worldscope database. This database contains the information on the majority of the publicly traded companies in each country. An attempt is made by Worldscope to standardize accounting information to improve cross-country comparability. The data cover the years 1993-2000.

Our initial sample included all firms with a primary activity in manufacturing (primary SIC codes from 2000 to 3999) with four or more years of continuous data on all raw indicators. We excluded subsidiaries of foreign firms. It may be argued that very large firms have access to international capital markets, and the features of the national financial system are unlikely to influence much their access to external finance. It may also be argued that in all financial systems banks monitor small firms closer than medium and large firms, and the relationships of a significant proportion [START_REF] Berger | Relationship lending and lines of credit in small business finance[END_REF] for the USA and [START_REF] Binks | The relationship between U.K. banks and their small business customers[END_REF] for the UK). The difference between the countries where bank-firm relationships are predominantly close and the countries where they are predominantly arm's-length is that in the former countries the relationships of firms with banks become arm's-length at a much later point in the firm's development (and at a much larger size) than in the latter countries (see e.g. [START_REF] Vitols | Are German banks different?[END_REF]. To infer whether differences in financial systems have implications for investment decisions, we therefore should exclude small and very large firms from the sample. This also makes samples more comparable across countries, since in some countries much more small firms are included in Worldscope's database than in others. Accordingly, we excluded all firms with the volume of sales in their last year in the sample smaller than $50mln, and all firms with the volume of sales in their last year in the sample larger than $10bln. In order to obtain the measures of variables which are consistent over time we made an effort to take into account major merger and acquisition activities. In particular, if the value of net plant, property and equipment in a particular year differed by a factor of 3 or more from that of the previous year, we excluded this observation and all observations for years either before or after it (retaining the longer sequence of observations). The sample was cleaned to reduce the influence of outliers. Basically we excluded all observations with zero values of K, I or S, observations with negative market-to-book ratio, and trimmed the data so that one percent of observations in the upper tail of each variables, and in the lower tail of cash flow ratio, were removed. After this procedure, some firms had less than four years of continuous data; these firms were excluded from the sample.

Our final sample includes 2601 firms with 11979 observations. Table 1 shows the numbers of firms and observations per country, and the means and standard We turn now to country-level variables reflecting the characteristics of the financial system. We characterize financial development by the volume of credit by deposit money banks and other financial institutions to the private sector relative to GDP, and the value of stock market capitalization relative to GDP. These indicators have been widely used to proxy for financial development (see e.g. [START_REF] Demirguc-Kunt | Law, finance and firm growth[END_REF]Love, 2001). The values of these variables are reported in columns 1 and 2 of Table 2.

We characterise the closeness of bank-firm relationships in a country by two variables. The first is the proportion of total stock market capitalization held by banks.

The values are reported in column 3 of Table 2. Our second indicator of the closeness of bank-firm relationship is build on the basis of the informed opinions of researchers on the character of firm-bank relationships in various countries. In the countries in our sample, bank-firm relationships are characterized as predominantly close in Finland, Germany and Japan, and as predominantly arm's-length in Australia, Canada, France, Italy, the Netherlands, Spain, the UK, and the USA 4 . Our second variable reflecting closeness of bank-firm relationships is thus a dummy equal to 1 for countries with predominantly close bank-firm relationships -Finland, Germany and Japan, -and to an important role according to the informed experts' opinion -Finland, Germany and Japan -have higher values of the bank equityholdings than the rest of the countries.

Results

Table 3 presents the results of the estimations of investment equations for the eleven countries. We observe that the coefficients of market-to-book ratio and lagged sales generally have the expected positive signs and are significant. We also observe that coefficients of cash flow ratio in countries with predominantly close bank-firm relationships are lower than in countries with predominantly arm's-length bank-firm relationships. Moreover, coefficients in all countries of the former group are not significantly different from zero at conventional levels, while coefficients in all countries of the latter group are significantly different from zero. This suggests that firms in countries with predominantly close bank-firm relationships are less financially constrained than firms in countries with predominantly arm's-length bankfirm relationships. This is confirmed by the more formal analysis. We regress the coefficients of cash flow ratios obtained in these regressions on the variables characterizing the financial systems of individual countries. The results are reported in Table 4. The regression on bank equityholdings explains a large part of variance, and the coefficient of the variable is significant with the expected negative sign. In the regression on the dummy for countries with predominantly close bank-firm relationships, the coefficient of the dummy is highly significant, and the regression explains more than 60 percent of variation in the dependent variable. At the same time, for regressions the cash flow coefficients on the variables reflecting financial development -the volume of credit relative to GDP and the volume of stock market 16 capitalization relative to GDP -the joint significance of the coefficients is far below conventional levels, and in the former case the adjusted R 2 is negative. The coefficients of the financial variables are not significant. This indicates that in developed countries the differences in investment-cash flow sensitivity are not related to the differences in financial development. In estimations with more than one regressor included the values and significance of coefficients are very close to those in bivariate regressions.

Discussion

The results presented in this paper are consistent with the findings of earlier studies that document the value of a close banking relationship. Our results are also consistent with the results of the previous cross-country comparisons of financial constraints on the firms' investment [START_REF] Bond | Investment, R&D and financial constraints in Britain and Germany[END_REF][START_REF] Mulkay | Firm level investment and R&D in France and the United States: A comparison[END_REF][START_REF] Bond | Financial Factors and investment in Belgium, France, Germany and the UK: a comparison using company panel data[END_REF]. As in these studies, we find that the firms in the USA and the UK are more financially constrained than the firms in France and Germany. Bond e.a. (1999) and [START_REF] Bond | Financial Factors and investment in Belgium, France, Germany and the UK: a comparison using company panel data[END_REF] argue that their findings suggest that firms in more 'marketoriented' Anglo-Saxon systems are more financially constrained than the firms in (less 'market-oriented') continental European systems. Our results suggest that this inference is not quite correct. There are several continental European countries in our sample, with financial systems that could not be easily classified as 'market-oriented', in which firms are more financially constrained than in the UK and the USA. The results of our analysis suggest that it is not 'market orientation' per se that is related to stronger financial constraints but the arm's-length character of bank-firm relationships.

Our results for the relationship of financial constraints to financial development differ from those obtained by Demirguc-Kunt and Maksimovic (1998) Love (2001), who find a significant negative relationship. These results and ours do not necessarily contradict each other, however. The authors of these two papers employ larger samples of countries which include both developed and developing countries. While there are significant differences among developed countries in the level of financial development, the level of financial development in developed countries is generally higher than that in developing countries (especially as far as the development of credit market is concerned). It is likely that financial development matters for the access of firms to external finance, but once financial development reaches a certain level its further increase per se does not improve this access; other factors (such as the character of relationships of firms and investors) play a more important role. It is also possible that the character of industrial development in developed countries differs significantly from that in developing countries, ensuring that the factors most significantly influencing the availability of external finance for investment differ between the two groups of countries.

In all countries, of course, there are both firms with arm's-length relationships and firms with close relationships with creditors. However, in most countries a vast majority of firms are of one of these types. There are significant forces ensuring that this would be the case. Deviating from a predominant pattern has costs of various kinds. The regulatory environment almost always supports a predominant type of relations in a country and makes it more costly (sometimes prohibitively costly) to enter into a different type of relations (see e.g. the discussion of the US regulatory environment by [START_REF] Roe | Strong Managers, Weak Owners: The Political Roots of American Corporate Finance[END_REF]). Various institutions would have developed in a country to facilitate the working of the predominant system [START_REF] Bebchuk | A theory of path dependence in corporate governance and ownership, Columbia Law School, The Center for Law and Economics Studies[END_REF]. Close relationships are based on mutual trust of the parties, and in an environment where the culture of such trust is not present close relationship may be difficult to establish (e.g. , 1992). The firms and financiers may continue to use the arrangement which they used in the past because they are familiar with these arrangements (but would have to adjust to new ones), or because the old arrangements have led to acceptable results, while the effectiveness of other arrangements is uncertain [START_REF] Fligstein | The Transformation of Corporate Control[END_REF][START_REF] Bebchuk | A theory of path dependence in corporate governance and ownership, Columbia Law School, The Center for Law and Economics Studies[END_REF]. New firms may use the same arrangements as successful established firms in the field [START_REF] Fligstein | The Transformation of Corporate Control[END_REF]. Some arrangements may become to be considered as standard or natural and be used by agents without much contemplation [START_REF] Fligstein | The Transformation of Corporate Control[END_REF]. Particular practices may be institutionalized within the business community, and a willingness of an agent to enter them may be considered as a signal of her trustworthiness [START_REF] Powell | Expanding the scope of institutional analysis[END_REF]. Several authors (e.g. [START_REF] Soskice | German technology policy, innovation, and national institutional framework[END_REF][START_REF] Soskice | Divergent market regimes: coordinated and uncoordinated market economies in the 1980s and 1990s[END_REF][START_REF] Streeck | Beneficial constraints: On the economic limits of rational voluntarism[END_REF]Whitley, 1999;Hall and Soskice, 2001) have argued that the character of the financial system is closely interlinked with the character of other aspects of the economic system, and together they form distinctive national patterns of economic organization (for example, the character of relationship among managers and employees in Germany would be very difficult to sustain without close relationships between firms and banks). Moreover, it has been argued that these distinctive patterns are deeply embedded in the social system in general (e.g. [START_REF] Hollingsworth | Continuities and changes in social systems of production: the cases of Japan, Germany, and the United States, in Contemporary Capitalism: The Embeddedness of Institutions[END_REF][START_REF] Orru | The institutional analysis of capitalist economies, in The Economic Organization of East Asian Capitalism[END_REF]. Some may argue that the distinction between financial systems with predominantly arm's-length bank-firm relationships and predominantly close bankfirm relationships is becoming meaningless in a world of increasingly global financial markets. However, the evidence suggests that financial markets are far from integrated, and many arguments exist suggesting that such integration is unlikely to eliminate differences in national financial systems (see e.g. [START_REF] Berger | National diversity and global capitalism: Introduction, in National Diversity and Global Capitalism[END_REF]). In particular, there is little evidence of a decline in the importance of main bank system in Japan. While in 1980s there were signs that some largest Japanese firms weakened their connections with main banks, the importance of the main bank system did not diminish. In the 1970-90s Japanese companies increased the share of borrowing from the main bank; the proportion of firms which changed the main bank decreased for medium-size firms; the number of directors dispatched from city banks to other listed companies increased by 34 percent from 1980 to 1993 [START_REF] Corbett | Changing corporate governance in Japan, in Corporate Governance, Financial Markets and Global Convergence[END_REF]. Differences found in this paper between in many respects similar companies in different countries indicate that national financial systems continue to matter when it comes to raising finance for investment.

Fixed investments are not the only type of firms' expenditures sensitive to capital market imperfections. Several studies find that this is also the case for inventory investments (e.g. Kashyap et al., 1994;[START_REF] Guariglia | The effects of financial constraints on inventory investment: evidence from a panel of UK firms[END_REF][START_REF] Bo | Dutch inventory investment: are capital market imperfections relevant?[END_REF] and R&D expenditures (e.g. [START_REF] Rafferty | Demand shocks and firm-financed R&D expenditures[END_REF]. It is therefore likely that close relationships with banks also reduce the liquidity constraints on these types of expenditures.

Our finding that stock market development does not help to overcome capital market imperfections is consistent the results of the previous literature indicating a limited importance of stock market for the firms' investments. [START_REF] Mayer | New issues in corporate finance[END_REF] and [START_REF] Röell | The decision to go public: an overview[END_REF] established that firms in general do not use proceedings from equity issues for new investment. Morck et al. (1990) and [START_REF] Samuel | Stock market and investment: the signalling role of the market[END_REF] find that that stock market signals are of very limited importance for the firms' investment decisions compared to the managers' own perception of fundamentals facing the firm.

One should be cautious in deriving strong conclusions from our results. We have not explored the question of whether the 'softer' budget constraints in the countries with closer bank-firm relationships just allow an increase in investment 20 towards the optimal level, or also investment beyond the optimal level. Theoretical literature argues that close bank-firm relationships make it more difficult for lenders to precommit not to refinance long-term low-return projects at the interim date [START_REF] Dewatripont | Credit and efficiency in centralized and decentralized economies[END_REF]. In addition, the banks that are also important shareholders may insure that the firm chooses projects with higher needs for finance over those needing less finance [START_REF] Baums | The German banking system and its impact on corporate finance and governance, in The Japanese Main Bank System: Its Relevance for Developing and Transforming Economies[END_REF]. Thus, overinvestment may occur in systems with predominantly close bank-firm relationships.

Despite this caveat, the evidence presented in this paper is highly suggestive.

Close bank-firm relationships appear to significantly reduce capital market imperfections and lead to higher availability of investment financing for firms. It indicates that, to the extent close bank-firm relationships are more difficult to form in some countries than in others, this may offer firms in such countries an important source of comparative advantage. In particular, we may expect that these countries may have a comparative advantage in more capital-intensive industries. Our results also suggest that firms from countries where bank-firm relationships are closer may on average be more capital-intensive, and increase in capital intensity would for them represent a more important source of productivity growth than for firms in countries with predominantly arm's-length bank-firm relationships. Investigation of these issues can be a fruitful avenue of future empirical research. An indication that these factors may be important is provided by the study of foreign-owned firms in the UK manufacturing by [START_REF] Wang | The relative economic performance of foreign subsidies in UK manufacturing[END_REF]. The authors find that Japanese-and Europeanowned (but not US-owned) firms are significantly capital-intensive more than indigenous UK firms, and this is one of the factors behind the higher productivity of these firms compared to the indigenous firms. On the basis of our findings one can conjecture that higher capital intensity of Japanese-and European-owned subsidies is

Conclusion

This paper investigates the influence of cash flow on corporate investment in eleven developed countries. We find that the sensitivity of investment levels to internally available funds differs significantly across countries. Coefficients of cash flow ratio in countries with predominantly close bank-firm relationships are lower and not significantly different from zero at conventional levels, and coefficients in countries with predominantly arm's-length bank-firm relationships are higher and are significantly different from zero. At the same time, we find no relationship of the levels of financial constraints to indicators of financial development -the volume of credit and the relative stock market capitalization, relative to GDP. Our results are consistent with the view that information and incentive problems in the capital market have important effects on corporate investment, and that close bank-firm relationships can reduce these problems and thus improve the access of firms to external finance. The countries are Australia, Canada, Finland, France, Germany, Italy, Japan, the Netherlands, Spain, the United Kingdom, and the United States. The set of countries for which the analysis could be undertaken was determined by the availability of data for the character of bank-firm relationship and by the necessity of having a sufficient number of firms for estimations. 2 Love notes that she has conducted the first type of tests using manufacturing firms only, and that the results are similar to those for the whole sample. Love, however, does not conduct the second type of tests for manufacturing firms; the coefficients of regressions for individual countries are thus not available.

3 This methodology is also used by Love (2001). A similar methodology is used by Demirguc-Kunt and Maksimovic (1998). 4 The references include: for Finland, [START_REF] Seppänen | Discretionary disclosure and external financing in a relationship financing environment[END_REF]; for Germany, [START_REF] Baums | The German banking system and its impact on corporate finance and governance, in The Japanese Main Bank System: Its Relevance for Developing and Transforming Economies[END_REF]; for Japan, [START_REF] Aoki | Monitoring characteristics of the main bank system: an analytical and developmental view, in The Japanese Main Bank System: Its Relevance for Developing and Transforming Economies[END_REF]; for Australia, [START_REF] Kenworthy | Search of National Economic Success: Balancing Competition and Cooperation[END_REF]; for Canada, [START_REF] Morck | Banks and corporate governance in Canada, in Corporate Decision-Making in Canada[END_REF]; for France, [START_REF] Quack | Hausbank or fournisseur? Bank services for small and medium sized enterprises in Germany and France[END_REF] and [START_REF] Hancké | Coordination and restructuring in large French firms: the evolution of French industry in the 1980s[END_REF]; for Italy, Barca e.a. (1998); for the Netherlands, [START_REF] Bolt | Corporate governance in the Netherlands[END_REF]; for Spain, [START_REF] Garcia | The role of banks in relaxing financial constraints: some evidence on the investment behavior of Spanish firms[END_REF]; for the UK and the USA, Chew (1997). Columns 1-2: Calculated from data in the World Bank database 'Financial Structure and Economic Development', //www.worldbank.org Column 3: [START_REF] Carlin | Finance, investment, and growth[END_REF]. The values of this variable are for most countries the averages for 1980-1990. For three countries the averages are for a different period: Canada (1981[START_REF] Fligstein | The Transformation of Corporate Control[END_REF]), Finland (1983[START_REF] Fligstein | The Transformation of Corporate Control[END_REF] and Italy (1985)(1986)(1987)(1988). The data for the UK are for 1991.

F

  in countries with more developed financial systems will have a better access to external finance.

  capital structure choice. Perfect capital markets ensure that external funds are perfect substitutes for internal capital. Firms are thus indifferent between various means to finance their investment. Numerous theoretical studies have argued, however, that the assumption of perfect capital markets cannot be maintained.

  . Long-term close bank-firm relationship helps to resolve this problem

  on country-level indicators of financial development. This second

  with banks are close in all systems (see

  variables by country. It can be seen that American and French firm have the highest mean values of investment, cash flow and sales ratios, and the highest standard deviations of these ratios. Japanese firms have the lowest mean values of investment and cash flow ratios, and the second lowest sales ratio, while Italy has the second lowest mean values of investment and cash flow ratios, and the third second lowest sales ratio. Japanese firms have the lowest standard deviation of investment and cash flow ratios, with Australian and Dutch firms also having low standard deviations.

  countries. Note that the countries where close bank-firm relationships play

  liquidity constraints on investment for firms from Japan and some European countries, due to the character of their relationships with banks.

  find that 'house

	F o
	r
	P e
	e
	r
	R e
	v i
	e w

Table 3 Results of investment regressions for individual countries

 3 Dependent variable is capital expenditure divided by capital. Within estimations. Year dummies are included in all regressions. Newey-West heteroskedasticity consistent t-statistics are in parentheses

		Market-to-book	Sales/capital	Cash flow/capital	Adjusted R 2
	Australia	ratio 0.0333 ***	0.0181 *	0.2050 ***	.28
	Canada	(2.67) 0.0097	(1.96) 0.0271 ***	(4.06) 0.1504 ***	.14
	Finland	(1.28) 0.0381 **	(3.20) 0.1369 ***	(3.95) -0.0690	.35
	France	(1.99) 0.0127 **	(5.78) 0.0314 ***	(-1.37) 0.0656 **	.23
	Germany	(2.36) 0.0083	(4.88) 0.0338 ***	(2.07) 0.0171	.19
	Italy	(0.17) 0.0106 ***	(5.40) 0.0415 ***	(0.89) 0.1088 ***	.20
	Japan	(1.90) 0.0013	(3.35) 0.0416 ***	(2.71) 0.0251	.14
	Netherlands	(0.66) 0.0043	(7.28) 0.0180 **	(1.18) 0.2209 ***	.26
	Spain	(1.15) -0.0208 *	(2.48) 0.0173 ***	(4.97) 0.1216 **	.17
	United Kingdom	(-1.75) 0.0109 ***	(3.12) 0.0252 ***	(2.32) 0.1201 ***	.24
	United States	(2.94) 0.0095 ***	(6.26) 0.0320 ***	(5.72) 0.0842 ***	.20
		(6.61)	(12.54)	(10.45)
	Note:

* Significant at 10 percent level. ** Significant at 5 percent level. *** Significant at 1 percent level.

Table 4 Investment-cash flow intensities and characteristics of financial systems

 4 Dependent variable is cash flow coefficients from regressions of individual country samples, reported in Table3. Number of observations is 11. OLS estimations. Newey-West heteroskedasticity consistent t-statistics are in parentheses ** Significant at 5 percent level.

	Dummy close bank-	1 -0.1436 ***	2	3	4
	firm relationships Bank equityholdings	(-3.91)	-0.1814 **
			(-2.33)
	Credit/GDP			-0.0032
				(-0.05)
	Stock market				0.1113
	capitalization/GDP Intercept	0.1346 ***	0.1616 ***	0.0988	(1.41) 0.0307
		(7.03)	(4.56)	(1.42)	(0.59)
	Adjusted	.59	.31	-0.11	.09
	Note:

*** Significant at 1 percent level. Page 35 of 35 Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK Submitted Manuscript

Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UKSubmitted Manuscript