This study aims to determine how access to finance and more specifically access to internal, external and total finance impacts small- and medium-sized enterprises (SMEs) innovation in Afghanistan.
This research is based on 404 SMEs; the data were collected by the World Bank enterprise survey between May 2013 and July 2013 in Afghanistan. This study uses a quantitative research design using logistic regression. The binary nature of the dependent variable required the use of ordered logistic regression and the analysis was done using STATA software.
The empirical results show that internal finance significantly impacts the innovation of firms, but external finance does not impact it significantly because most SMEs do not have access to bank loans due to too much administrative work and high collateral requirements, the second reason is the religious belief of society, which interest rate is prohibited in Islam, most of the firms usually do not issue loans from the financial institution which give loan on interest base. Even the collateral requirements variable has been omitted due to the small number of observations. The study found that older firms and those with research and development are more engaged in innovation activities. The city-wise result showed that external, internal and total finance significantly impact firms’ innovation in Herat city; firms are more innovative in this city. Access to external and total finance significantly impacts the innovation of SMEs in Kabul.
The research findings have important policy implications for achieving SME’s innovation, by facilitating SMEs’ access to finance sources. What brings innovation in developing and underdeveloped countries, especially in Afghanistan due to data limitation, the World Bank enterprise survey data gave has this opportunity.
