Firms often rely on external financing in order to conduct R&D. The question is to

what extent discriminatory behaviour of the funds provider affects the industry evolution.

The model is based on an evolutionary framework by Nelson and Winter. A firm chooses

its R&D spending in an adaptive fashion where technological improvement is essential

for survival in the competitive market. Firms can finance their activities by using retained

profits or applying for credit. However, they have a clear hierarchy in choosing the source

of funds and saved profits are always used up first. There is endogenous discriminatory

lending as the banking sector provides credit according to firms’ individual features. It

compares profitability and market share across firms when assessing creditworthiness.

The model is able to capture features of innovation and diffusion of technology. Results

show that the availability of credit is crucial for technological change in a non-linear

fashion and that the industry evolves faster if the bank values market share more in

assessing creditworthiness.