Pharmaceutical innovation and access to financial markets.

While prior research shows that pharmaceutical innovation generates measurable benefits for society, over the last 70 years, the innovative activities of pharmaceutical firms have dramatically declined. In this study, we develop and test the hypothesis that to innovate, pharmaceutical firms must have access to capital through well-developed financial markets. Using a broad cross-country sample from 1989 to 2016, we document that financial market development is associated with greater levels of pharmaceutical innovation. To draw stronger causal inferences, and to overcome potential endogeneity issues, we use both instrumental variable and difference-in-difference analysis. Our results suggest that access to capital markets plays a vital role in pharmaceutical innovation.