The purpose of this paper is to investigate how firms in developing countries finance innovation. Notably, the study seeks to investigate whether innovative firms exhibit financing patterns different from those of non-innovative ones. It also examines the effect of financing sources on firm’s probability to innovate.
The study utilizes firm-level data from the World Bank Enterprise Survey. From 28 African countries, 11,173 firms have been included in the sample. A statistical t-test is used for two independent samples and logistic regression models.
The results show that innovative firms, specifically innovative small- and medium-size firms exhibit financing patterns different from non-innovative peers. Further analysis indicates that there is no statistically significant difference between the financing patterns of innovative and non-innovative large firms. In Africa, innovation is mostly financed using internal sources and bank finance. Equity finance and bank finance have shown a higher effect followed by internal finance, finance from non-bank financial institutions and trade credit finance on firms’ probability to innovate.
The management of innovative firms should reduce dependency on short-term and retained earning financing and increase the use of long-term instruments improve innovation performance.
A pending policy task for African leaders is to design and evaluate reforms to create a strong financial sector that willing to support the innovation process.
This study contributes to the existent literature on finance of innovation by examining how firms finance innovation activities in developing countries. This study provides evidence on how innovative firms exhibit financing patterns different from non-innovative ones from developing countries.
