We use various measures of access to finance and financial constraints to examine its effect on firm’s likelihood of undertaking innovation activities by employing unique, rich data from World Bank’s Enterprise Surveys for over 26,700 firms for 21 countries across all regions. We find robust evidence of the role of financial constraints as an impediment for firm innovation outputs including core (product or process innovations) as well soft forms (organizational-managerial and marketing innovations). After controlling for endogeneity concerns, our empirical evidence is robust to alternative measures of innovation activities, measures of financial constraints, innovation output complemenatrities, and for various sub-samples. These findings suggest that bank financing can play a crucial role in stimulating and promoting a variety of innovation activities in the developing countries. Further, in a first, we find that financial constraints’ impact decreases in the innovation output novelty. In other words, impact of financial constraints is stronger for the less novel products than for the more novel, radical innovations, highlighting the need to take into account the innovation novelty in assessing finance-innovation nexus.

Keywords: innovation, productivity, financial constraints, firm performance
Jel classification: G32, D24, L26, O3​