Financial structure and innovation: firm-level evidence from Africa

Purpose - The purpose of this paper is to examine the effect of the financial structure on innovation. Design/methodology/approach - We utilize the matched firm-level data from two sources: the World Bank Enterprise Survey and the Innovation Follow-Up Survey. A total of 3,664 firms from 11 African countries are included. Findings - The authors find a financially constrained and low technology-intensive firm that uses internal finance more than its peers is less likely to innovate. Our results also show that a firm that uses new equity and debt finance more than its peers is more likely to innovate. The results particularly suggest the significant effect of bank and trade credit finance on firms’ innovation. The extent and, in some cases, the direction of the effect of dependence on internal finance, new equity finance and debt finance on innovation vary due to the heterogeneity in firm size, age and ownership status. Corporate innovation is also associated with firm size, R&D, cooperation, staff training, public support, exportation and group membership. Practical implications - The management of companies, particularly financially constrained firms, should reduce their dependence on internal finance, which negatively affects their innovation. As a remedy, they could improve their reliance on new equity finance and debt finance, especially bank finance and trade credit finance, which positively affect their innovativeness. Social implications - A pending policy task for African business leaders is to design and evaluate reforms that help create strong financial sectors willing to provide capital to a broad range of firms, particularly small and young firms. Originality/value - This study adds new evidence to the recent surge of debate on the trade-off between going public, using debt or heavily using internal sources to finance innovative projects, and which of these is more important in promoting firm-level innovation.