Innovation and Financial Development from a Global Perspective - Empirical Evidence from Manufacturing Firms in Developing Countries

Abstract

Abstract Financial development, i.e. access to finance, is needed for innovation and to resolve the current under-allocation of innovation investments in small firms in countries with lower financial development. Using firm level data from over 12,500 manufacturing firms and country characteristics from developing countries, we study the link between R&D, as a proxy for innovation, and financial development in terms of probability, expenditure, and productivity of R&D investments. We find that both firm size and financial development has a strong positive correlation with the probability of a firm engaging in R&D. We also find, using a R&D index, that small firms are more productive then larger firms in terms of R&D. It is also shown that levels of innovation between small and large firms decreases when financial development increases.