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Firm innovation and access to finance: firm-level evidence from India

Parneet Kaur (Punjabi University, Patiala, India)
Navneet Kaur (Amrita Vishwa Vidyapeetham – Bengaluru Campus, Bangalore, India)
Paras Kanojia (Punjabi University, Patiala, India)

Journal of Financial Economic Policy

ISSN: 1757-6385

Article publication date: 22 March 2021

Issue publication date: 3 January 2022

765

Abstract

Purpose

Based on 9,281 firm-level survey data on micro, small and medium enterprises (MSMEs) in India, this study aims to investigate how access to different finance sources and collateral requirement facilitates the firm’s innovation activity across industries.

Design/methodology/approach

This paper used ordered logit regression models using Stata software for explanatory variables to measure the impact of explanatory variables on firm innovation performance. Firms’ innovation performance is measured through the aggregate innovation index obtained by adding up the no. of “new-to-firm” activities.

Findings

The empirical results reveal that external sources of funding impact innovation activity than other financing sources. Also, the requirement of collateral for financing impacts innovation performance significantly. This paper finds that firms funded by state-owned banks or government agency are more actively engaged in innovation activities. The firm’s size, ownership structure and location of the firm also show the varying innovation performance. This paper found variation in innovation performance across industries as well.

Practical implications

First, the present study underlines the significance of funding sources. Second, minimizing the need for collateral to obtain external finance boosts small firms’ innovation activity and will also trigger overall economic growth. Finally, while making policies for ownership transformation of state-owned institutions, policymakers should discuss these policies’ impact on innovative firms.

Originality/value

What facilitates innovation performance in an emerging market is missing in the literature for MSMEs, largely due to lack of data. It is reasonable not to generalize innovation knowledge in large firms to small firms because of the constraints, particularly MSMEs face.

Keywords

Citation

Kaur, P., Kaur, N. and Kanojia, P. (2022), "Firm innovation and access to finance: firm-level evidence from India", Journal of Financial Economic Policy, Vol. 14 No. 1, pp. 93-112. https://doi.org/10.1108/JFEP-07-2020-0161

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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