Innovation, Credit Constraints and National Banking Systems: A comparison of developing nations

Abstract

International audienceThis chapter extends exiting micro-level studies on the financing decisions of enterprises in developing countries by connecting these decisions both to firms’ innovation activity and to the wider institutional framework formed by the national banking system. The national banking system is recognized as being central to the ability of developing-country firms to acquire the resources and develop the capabilities needed for innovation. We investigate the links between innovation and financial system characteristics for a sample of 36 developing nations spread across 5 regions of the world: Sub-Saharan Africa, the Middle East and North Africa, East Asia and Pacific, South Asia and Central Asia. Our results show that credit constraints have a significant negative impact on innovation performance and that the depth and breadth of the national banking system indirectly affect innovation through their impact on the likelihood that firms face these financing constraints. Moreover, we find that large firms tend to benefit disproportionately from increases in banking system depth while small firms, and to a lesser extent medium-sized firms, reap relative innovation benefits from increases in banking system breadth