This paper empirically analyses the effects of liquidity constraints on R&D investment using a panel of Spanish manufacturing firms for the period 1991-1999. Our results provide evidence that suggests that financial variables in small firms are more relevant for R&D investment decisions. For small firms, we compare our results for investment in R&D with investment in physical capital and we do not find strong evidence that the latter is financially constraining.

Key words: financial constraint, R&D activities, SME.
JEL classification: G31, G32, O32.