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Formal credit and innovation: Is there a uniform relationship across types of innovation?

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  • Wellalage, Nirosha Hewa
  • Locke, Stuart

Abstract

We investigate the formal credit effect on firm level innovations of small and medium enterprises in developing economies. Using the instrumental regression method, we control for potential endogeneity in innovation and credit relationships. Results indicate that formal credit availability boosts all four types of innovations. However, this impact is more significant for soft innovations compared to hard innovations. The results also point to the importance of informal finance as a source of external finance for firms where capital markets suffer from imperfections. Our study encourages the development of policy around financing for various types of innovation, which is especially suited for developing economies.

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  • Wellalage, Nirosha Hewa & Locke, Stuart, 2020. "Formal credit and innovation: Is there a uniform relationship across types of innovation?," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 1-15.
    • Handle: RePEc:eee:reveco:v:70:y:2020:i:c:p:1-15
    DOI: 10.1016/j.iref.2020.07.004
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    More about this item

    Keywords

    Innovation; SMEs; Formal credit; Endogeneity; Instrumental probit regression; Developing economies;
    All these keywords.

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • G2 - Financial Economics - - Financial Institutions and Services
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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