To explore the impact of financial factors on the real economy, many researchers are analyzing the relationship between finance and real economic activity using new theories and approaches. This paper focuses on the relationship between financial health and corporate R&D activities at a regional scale. The real economy and finance have different aspects, but this paper mainly focuses on corporate R&D activities on the real economy side, as well as regional financial stability on the finance side.

Since the 2000s, Carpenter and Peterson (2002) and Oliveira and Forturato (2006) have suggested that internal finance can have a significant influence on the growth of small firms. Research projects on the relationship between innovation activities and finance are developing, and they incorporate their own viewpoints to understand innovation activities and financial elements. How the financial side data is understood is important in empirical analysis of the relationship between finance and innovation activities.

5 This paper does not make clear arguments, but regulatory/supervisory authority policies also act as external elements that have impacts on the relationship between bank's financial position and corporate loans. The financial health in this period also had great dispersion depending on the region (Fig. 1). The institutional framework on the financial system has continuity to a certain extent, because it is after the introduction of the system of rapid corrective action, which is a major turning point for Japan's financial administration.

Even if these samples were included, it would have only a negligible impact on the analytical results.

## Empirical analysis

The parameters of the share of bad loans have positive values in all cases, but they are not statistically significant. Since the sign of the proportion of non-performing loans is reversed in the calculation, it is expected to have a positive value). When using ROA, estimates have significant positive values in any of the three estimation approaches.

If composite indicators are used, the parameters take significant positive values in the case of OLS and random effects model. However, based on the result of the Hausman test, the fixed effects model is chosen over the random effects model. In the random fixed-effect model, the indicators meet the sign condition, but only the ROA-based case is significant.

The analysis has revealed that the parameters of financial health in the linear panel model have increased on average by about 50% and have become more statistically significant (Table 5). In particular, composite sustainability indicators, derived as common elements from multiple indicators, obtain statistically significant values in each of the three estimation approaches, including the fixed-effect model. Regarding the mentioned model, any of the three sustainability indicators obtain statistically significant values in the fixed effect models.

For example, a 1% improvement in the NPL ratio will lead to an increase in R&D expenditure of about 6% (in the SME samples, a 1% change in the NPL ratio corresponds to 1.2 within a standard deviation). Internal financial parameters are statistically significant in the case of OLS and random effect models, but less significant in fixed effect models. For example, good conditions in the regional economy should promote financial stability in the region.

The regression analysis showed that among the three financial soundness indicators, the non-performing loans ratio and the composite indicator assume statistically significant values (Table 6). For example, a 1% improvement in the non-performing loan ratio will increase R&D expenditures by approximately 7%. There appears to be a closer relationship with the financial soundness indicator of the previous year, than with that of the current year.

## Conclusions

The results are shown in Table 7, and financial soundness parameters generally have statistically significant positive values. One of the characteristics of the dependent variable R&D expenditure is that many respondents gave the value zero. So far we have used R&D expenditure as a variable of R&D activities, and a corresponding estimate has also been made based on the number of R&D employees.

These factors indicate that companies are more cautious about increasing/reducing their R&D staff or face difficulties in hiring staff quickly even if they want to. SMEs, in particular, are said to have difficulty increasing R&D staff when needed. Using different indicators and approaches to analyze the relationships between regional financial strength and research and development activities, the analysis reveals that there is a relationship between regional financial strength and research and development activities for companies, especially SMEs.

Analytical findings suggest that regional finance plays important roles in revitalizing the regional economy by encouraging innovation. If so, prudential policies to stabilize the financial system can also contribute to the development of the regional economy. In particular, regarding the simultaneous nature of regional finance and innovative activities, it is necessary to aggregate analytical findings with more data, taking into account the causal relationships between these two factors.

Research projects on the relationships between regional finance and firms' innovation activities are important not only for satisfying the interest of researchers, but also for the management of the actual economy. The opinions expressed in this article are the author's personal opinions and do not represent the official views of the Research Institute for Economics, Trade and Industry. R&D-related indicators used as dependent variables in this paper are (i) the amount of R&D expenditure and (ii) the number of R&D personnel.

The former is a firm's self-financed R&D expenditures, while the latter represents the sum of R&D staff serving at headquarters and research centers. To mitigate the extreme variation resulting from the firm size gap and to standardize the data, the former is a natural logarithm of R&D expenditure plus one, while the latter is R&D staffing as a percentage of the average number of employees during the estimated period. As the NPL ratio takes the opposite sign plus 100 percent, an increase in value means improved financial health.

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