This paper aims to examine the effect of financial constraints on different forms of innovation using a sample of 19,663 firms for the year 2019 and 14,668 firms for the year 2022 in 34 emerging economies. This study explores the link between innovation and financial constraints in both the pre-COVID-19 and post-COVID-19 periods.
The probit method is used to investigate the influence of access to finance on innovation. This study also controls for different aspects including financial characteristics, institutional factors, human capital factors and technological capabilities.
After accounting for various firm characteristics, the findings indicate that both in the pre-COVID-19 period and the post-COVID-19 period, financial constraints have a negative and significant impact on innovation, indicating that firms remain reliant on external finance for their innovative activities.
In the face of limited research on firm-level innovation practices and financial constraints, the results contribute to the nascent cross-country literature exploring the connection between finance and innovation. Given that technological capabilities were of particular importance during the COVID-19 period, this study controls for these relevant capabilities.
