Financial structure and innovation: firm-level evidence from Africa
Abstract
Purpose
The purpose of this paper is to examine the effect of the financial structure on innovation.
Design/methodology/approach
We utilize the matched firm-level data from two sources: the World Bank Enterprise Survey and the Innovation Follow-Up Survey. A total of 3,664 firms from 11 African countries are included.
Findings
The authors find a financially constrained and low technology-intensive firm that uses internal finance more than its peers is less likely to innovate. Our results also show that a firm that uses new equity and debt finance more than its peers is more likely to innovate. The results particularly suggest the significant effect of bank and trade credit finance on firms’ innovation. The extent and, in some cases, the direction of the effect of dependence on internal finance, new equity finance and debt finance on innovation vary due to the heterogeneity in firm size, age and ownership status. Corporate innovation is also associated with firm size, R&D, cooperation, staff training, public support, exportation and group membership.
Practical implications
The management of companies, particularly financially constrained firms, should reduce their dependence on internal finance, which negatively affects their innovation. As a remedy, they could improve their reliance on new equity finance and debt finance, especially bank finance and trade credit finance, which positively affect their innovativeness.
Social implications
A pending policy task for African business leaders is to design and evaluate reforms that help create strong financial sectors willing to provide capital to a broad range of firms, particularly small and young firms.
Originality/value
This study adds new evidence to the recent surge of debate on the trade-off between going public, using debt or heavily using internal sources to finance innovative projects, and which of these is more important in promoting firm-level innovation.
Keywords
Acknowledgements
We thank the World Bank Enterprise Group for providing access to the firm-level Business Enterprise Survey and Innovation Follow-Up Survey. This paper was presented at the 6th Annual International Accounting Symposium organized by the Asian Review of Accounting, which was held from June 30 to July 1, 2023. We express gratitude to all symposium participants for their valuable comments and suggestions. In particular, we sincerely thank Professor Jeff Zeyun Chen for providing constructive input that has elevated the manuscript to its current state. Additionally, we extend exceptional thanks to Professor Nan Zhou, the Editor, for unwavering support during the symposium and the manuscript’s review process.
Citation
Ayalew, M.M. and Zhang, J.H. (2024), "Financial structure and innovation: firm-level evidence from Africa", Asian Review of Accounting, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/ARA-11-2022-0276
Publisher
:Emerald Publishing Limited
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