The Effects of Product Differentiation and Process Innovation on Credit Rationing

Informational credit rationing is a disequilibrium phenomenon in credit markets, in which price mechanisms fail to allocate credit efficiently due to informational frictions. It is commonly argued that innovative firms are particularly susceptible to credit rationing because innovation may exacerbate information asymmetries between firms and lenders. However, this argument often overlooks the improvements in internal information and management required to undertake such activities, which can influence the net change in information available to lenders. These improvements can enhance transparency and reduce agency problems, potentially offsetting the initial informational disadvantages. Using data from the World Bank Enterprise Surveys for medium and large formal firms and proxy indicators such as product differentiation and process improvement, this study estimates the average effect of innovation-related activities on access to credit. The results reveal statistically significant reductions in the probability of experiencing credit rationing, with marginal effects ranging from 11.8 to 19.7 percentage points. These findings are robust across model specifications and suggest that product differentiation, while initially increasing informational frictions, ultimately improves firms credit profiles.