Do Credit Constrained Firms in Africa Innovate Less? A Study Based on Nine African Nations

Abstract

This paper draws on the results of World Bank Enterprise surveys to investigate the relation between financials constraints and innovation performance for a sample of firms in 9 African nations: Ethiopia, Zimbabwe, Rwanda, the Central African Republic, Uganda, Zambia, Tanzania, Ghana and the Democratic Republic of Congo. In common with much of the recent literature focusing on these issues, the analysis makes use of direct measures of innovation and of financial constraints. The econometric analysis takes into account the potential endogeneity of financing constraints to the firm’s decision to innovate. The results show that financing constraints have a negative impact on the probability of successful innovation and that this negative impact tends to be greater both for small-sized firms compared to large firms and for young firms compared to old firm. The results have important policy implications and strongly suggest that government subsidies and financial support programs for micro and small-sized firms could make a positive contribution to increasing the innovation performance of African nations.

Keywords: credit constraints, African nations, bivariate probit model

JEL Classification: G110, G150