FINANCIAL STRUCTURE AND INNOVATION: FIRM LEVEL EVIDENCE FROM ETHIOPIA

Abstract

This paper aimed at examining the relationship between financial structure and innovation based on evidence from firms in Ethiopia. The study employed quantitative research approach and cross sectional data of World Banks’ Enterprise Survey (WBES) between the years of 2012 and 2014was used. Seven hypotheses were investigated using probit regression and Mann Whitney test (U-test) techniques. Probit model considered the effect of financial structure (sources of finance) on firm’s probability to innovate. The effect of financial structure on firm’s probability to innovate across firms’ size and age is also examined using this model. Mann Whitney test, on the other hand, was used to distinguish financing pattern of innovative and non-innovative firms which also used to know financial sources of innovative firms. Empirical results indicated that the main sources of finance for Ethiopian innovative firms are internal finance followed by debt finance (principally bank finance). Further, innovative firms exhibit different financing pattern from non-innovative firms in Ethiopia. Finally, the study found that financial sources have significant effect on innovation which is different across firms’ size and age. The order of effect is nonbank finance, bank finance, debt finance, internal finance and equity finance. Based on these results the study recommended management to consider finance source with higher effect to improve their innovation performance. The size and age of their firms also need to be considered as financial sources have different effect among size and age group. Further, policy makers are suggested to take these facts into account while facilitating sources of finance for firms.