Abstract
Whether bank credit is suitable to finance innovation is a key question. Using a sample of 6422 small firms across 22 emerging economies, we find that a lack of access to credit stifles innovation, especially of the technologically "hard" type. This detrimental impact is stronger in localities or sectors with more dependence on external financing, but only holds for firms that are limited in alternative financing sources. The negative impact is further mitigated by better institutions. Foreign or transactional banks, or banks in more diversified banking markets are better in promoting firm innovation.
Ongena, Steven