External Financing and Innovation in Small and Medium Enterprises - The Case of Vietnam

Abstract

This paper examines the relation between small and medium-sized enterprises (SMEs)’ capacity to access external capital and innovation in Vietnam. We find that SMEs with high external financing capacity captured by debt and loan ratios tend to be highly engaged in innovation activities. After controlling for several firm characteristics, long-term debt remains significantly and positively correlated with all types of innovation including the introduction of new products and technologies and improvements of existing products. We further show that both bank loans and loans from family and friends help SMEs innovate, especially in developing new products or technologies. Overall, our paper shows that external financing plays an important role in enhancing innovation in SMEs.

Keywords: access to financing, external capital, innovation, SMEs, Vietnam

JEL Classification: G31, G32, O32