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The effect of financial constraints on innovation in developing countries

Author

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  • Misraku Molla Ayalew
  • Zhang Xianzhi

Abstract

Purpose - The purpose of this paper is to investigate the effect of financial constraints on innovation in developing countries. It also examines how the effect of financial constraints varies by sector and with main firm characteristics such as size and age. Design/methodology/approach - The study utilizes matched firm-level data from two sources; the World Bank Enterprise Survey and the Innovation Follow-Up Survey. From 11 African countries, 4,720 firms have been included in the sample. A recursive bivariate probit model is used. Findings - The result shows that financial constraints adversely affect a firm’s decision to engage in innovative activities and the likelihood to have product innovation and process innovation. The results point out that the extent of the adverse effect of financial constraints on innovation differs across the sectors, firm size and age groups. A firm’s innovation is also explained by firm size, R&D, cooperation/alliance, the human capital of the firm, staff training, public financial support and export. At last, the probability of encountering financial constraints is explained by firms’ex antefinancing structure, amount of collateral, accounting and auditing practices and group membership. Practical implications - Managers should strengthen the internal and external financing capacity to reduce financing constraints and their adverse effect on innovation. Social implications - A pending policy task for African leaders is to design and evaluate reforms that reduce the adverse effects of financial constraints on innovation. Originality/value - This study contributes to the existing literature on financing of innovation by examining how and to what extent financial constraints affect innovation across various sectors, size and age groups.

Suggested Citation

  • Misraku Molla Ayalew & Zhang Xianzhi, 2019. "The effect of financial constraints on innovation in developing countries," Asian Review of Accounting, Emerald Group Publishing Limited, vol. 28(3), pages 273-308, October.
  • Handle: RePEc:eme:arapps:ara-02-2019-0036
    DOI: 10.1108/ARA-02-2019-0036
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    Citations

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    Cited by:

    1. José Manuel Santos‐Jaén & Antonia Madrid‐Guijarro & Domingo García‐Pérez‐de‐Lema, 2021. "The impact of corporate social responsibility on innovation in small and medium‐sized enterprises: The mediating role of debt terms and human capital," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 28(4), pages 1200-1215, July.
    2. Rawan Elshaarawy & Riham A. Ezzat, 2023. "Global value chains, financial constraints, and innovation," Small Business Economics, Springer, vol. 61(1), pages 223-257, June.
    3. Sdiri, Hanen, 2022. "Impact of formal and informal institutional constraints on innovation: firm-level evidence from Tunisia," MPRA Paper 113792, University Library of Munich, Germany, revised 2022.

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