The Impact of Access to Finance on firm’s growth and Innovation: Evidence from Ethiopia

Abstract

The main objective of this study is to investigate the impact of access to finance on innovation and growth and to examine the effect of innovation on firms growth in Ethiopia. The study used the survey data that come from the 2015 World Bank Enterprise Survey (WBES) for Ethiopia. The 2015 WBES is the latest available survey data that covered three years ranging from 2012 to 2014. The WBES used standardizes global methodology in determining sample size and conducting the survey. A total of 567 observation that satisfy the selection criterion are actually included in this study. Quantitative research approach and explanatory research design was used. Probit regression model was used to investigate the impact of access to finance on firm’s innovation. The Ordinary List Square (OLS) regression mode was used to examine the effect of access to finance and innovation on firm’s growth in Ethiopia. Stata version 14 was used to analyze the data and estimate the models. The result from the probit regression analysis I found that firms that have access to finance measured using four indicators are more likely to innovate than those who do not have access to finance. Firms who also invest in R & D are more likely to innovate. From the OLS regression, result I found that using improved products or process have significant positive impact on firm’s growth and similarly firms with better access to finance exhibit better growth. The result further shows that on average 48% of sampled firms has introduced Technological product and process (TPP) in the last three years of the survey. In addition to this, 70.3% of the firm in Ethiopia encountered financial constraints.