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Archives of Business Research – Vol. 9, No. 7
Publication Date: July 25, 2021
DOI:10.14738/abr.97.10533. Asiedu, M. (2021). Firm Characteristics, Financing and Firm Innovation in Africa. Archives of Business Research, 9(7). 177-198.
Services for Science and Education – United Kingdom
Firm Characteristics, Financing and Firm Innovation in Africa
Michael Asiedu
School of Accounting
Zhongnan University of Economics and Law, Wuhan - China.
Gabriel Kyeremeh
School of Finance
Zhongnan University of Economics and Law, Wuhan – China
ABSTRACT
The study employed firm level data from the World Bank’s Enterprise Survey
Indicator Database to investigate firm characteristics associated with firm
innovation in 32 African countries, for the period 2009 to 2018. We find that firm
level innovation, including the introduction of significantly new products (H1), new
or significantly improved methods of manufacturing products (New Technology)
are strongly associated with external funding sources (funds from Banks and non- banking institutions). In addition, firm level characteristics such as firm age, female
ownership, capacity utilization, educated labor force, exposure to competition is
strongly associated with firm innovation. These findings are very important for
countries in Africa (and other less-developed countries) who spend less on research
and development due financing and structural constraints but want to accelerate
economic growth and increased productivity.
Keywords: Firm Innovation, Firm Financing, New Technology, New Product, Internal
Funding
INTRODUCTION
While most economist including (Baumol 2002; Carpenter 1943; Aghion and Durlauf 2005)
have built consensus that innovation is a key catalyst for sustained economic growth and
development through the mediating roles of finance (mostly external funding) There is
however, scanty evidence from less-developed countries on the adverse effects of obstacles to
access to finance and corporate governance on productivity through innovation.
Recent studies by (Ayyagari and Maksimovic 2007; Ayyagari, Demirgüç-Kunt, and Maksimovic
2011;Fernandez 2017; Beck, Demirgüç-Kunt, and Maksimovic 2005) have provided important
guide and support for firm innovation and financing for small and medium size firms in less- developed and emerging markets. We align with (Ayyagari, Demirgüç-Kunt, and Maksimovic
2011) that the limited studies on innovative practices of small and medium firms in Africa is
largely due to data constraints. Even though majority of small, medium and large firms in Africa
face mounting challenges few studies have been conducted to understand their unique and
underling feature and operating environment.
This study adds to firm innovation’s literature in Africa using firm level date from the World
Banks Enterprise Survey Database to examine the determinants of the rate at with firms
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innovate and their adaptation within the market space. We examine the relationship between
firm innovation activities, firm characteristics (age, legal status and firm location) and business
environment constraints such as obstacle to finance, activities of market competitors and
ownership structure, among others. Our sample consist of 18,335 manufacturing firms from 32
countries in Africa.
According to the Enterprise Survey Database, firm innovation activities cover as set actions
including introduction of a New Product, new or significantly improved methods of
manufacturing products (New Technology), new or significantly improved logistical or
business support processes, new or significantly improved structures or management
practices, introduction to new or significantly improved marketing methods, did this
establishment spend on formal research and development activities by the firm, either in-house
or contracted with other companies, did this establishment give its employees some time to try
out or to develop a new idea or new approach about products or services, firm management,
business process, or marketing, and other related innovation questions such as whether the
firm has ISO certification and using technology licensed from a foreign-owned company. We
find from the regression result between firm characteristics (age, ownership type, legal status,
capacity utilization) and innovation activities. We find evidence of a strong and positive
relationship between firm age, capacity utilization, typical working hours per week of the firm
and innovation after controlling for firm location, location size, and industry. In contrast we
find the legal status of firm (listed companies, companies with non-traded shares, and sole
proprietorship firms) have significant and negative association with firm innovation against
the limited partnership firms.
We also find from the regression results between firm innovation, sources of working capital
and obstacle to access to finance dummies. We find that firms faced with severe obstacles to
access finance are less innovative. These firms are less likely to meet the outlay for innovation.
We record that internal working capital source in weakly and negatively associated with firm
innovation. However, firms that use external sources of funding as working capital such as
borrowing from banking and non-banking institutions are more innovative.
Further analysis show that firms with female ownership are more innovative than firms
without female ownership. We also find a negative and very weak relationship between firm
private domestic firms, foreign domestic firms and firm innovation. Top manager experience
and top female manager variables are found not to positively affect firm innovation within the
sample.
The relationship between firm competition and firm innovation we find that firms with high
sales volume, market shares, number of competitors, average number of days to clear goods at
customs post, and compete against unregistered or informal firms significantly and positively
affects firm innovation among the sampled firms in Africa. This finding means that innovative
firms can achieve higher sales volumes and also able to capture larger fraction of the market.
We confirm that firms with high-capacity utilization, the typical hours of operation in a week of
a firm, education of employees and firms with more productive workers are significantly more
innovative.
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Asiedu, M. (2021). Firm Characteristics, Financing and Firm Innovation in Africa. Archives of Business Research, 9(7). 177-198.
URL: http://dx.doi.org/10.14738/abr.97.10533
In summary, our results add to the limited extent literature on firm innovation and firm
characteristics in Africa by providing supporting evidence on the possible avenues through
which firm characteristics and access to firm finance (especially external funding such as
banking and non-banking financial institutions) accelerate innovation and stimulates growth.
Earlier studies including (Fernandez 2017); (Verdier et al. 2010); (Ayyagari and Maksimovic
2007); (Aghion, Howitt, and Mayer-Foulkes 2005) and (King and Levine 1993) have all
highlight the mediating roles of developed financial institution and the effects of absence or
inadequate funding for innovation activities. The availability of funding sources and efficient
capacity utilization are catalyst for poor countries (in this case Africa countries) to initiate
innovation activities through research and development for growth.
The study is significantly different from previous research in that it focuses mainly on Africa
(32 African countries) and the use of firm level data to examine the interrelationship between
firm innovation and firm characteristics. The remainder of the study follows this pattern:
section two discusses the relevant literature review of existing theoretical and empirical work,
section three focuses on the data description and data sources, section four presents the
methodology. The results and discussion are showed in section five and section six is the
conclusion.
LITERATURE REVIEW
Several studies have been conducted on the relevant interrelationship between firm
innovation, access to firm finance and critical firm characteristics. For instance (Aliyu, Ahmad,
and Nordin 2019) identified firm innovation to mediate on Access to firm Finance and Business
Performance of Women Entrepreneurs in Nigeria. (Lee, Sameen, and Cowling 2015) reported
that in a study containing 10,000 UK firms that innovative firms are more likely to be denied
access to finance than non-innovative firms. This phenomenon they observed get worse during
financial crises. However, after controlling for a host of firm characteristics, they found
pronounced evidence of worsening conditions for non-innovative firms. This finding critically
highlights setbacks with the financial sector. One is the structural problem which limits access
to financial for innovative firs and the other is the severe impact on non-innovative firms of the
cyclical problem caused by the financial crisis. (Camisón and Villar López 2010) also identified
that firm productivity is associated with the complementary of organizational and
technological innovations among 159 Spanish firms. They argue that the effect of adapting a
flexible productive system is mediated by incorporating process, organizational innovation and
product.
In a sample of 1,356 food brands (Sharma, Davcik, and Pillai 2016) examined the influence of
product innovation as a mediating role on research and development spending and brand
equity on marketing performance. They find show that multinational companies (MNCs) are
able to advance their market shares and product innovation to a larger extent than small and
medium enterprises (SMEs) and retailer firms. (Fernandez 2017) concluded that firm age, firm
size, financial constraints and funding sources are the key drivers of firm innovation in
Argentina, Chile, Colombia, Mexico and Peru.
All these recent studies discussed above provide significant support to earlier studies including
(Demirg-Kunt and Maksimovic 1998) (Rajan and Zingales 1996) that constrained access to
finance (mostly external finance) slows growth. Rather a robust, not necessarily large, stock
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market and banking sector links externally financed firm growth. However, the mediating
channels through which access to firm finance stimulates firm productivity remains
challenging. Meanwhile it is technological advancement and skill acquisition rather than capital
accumulation that accounts for the difference in output around the world (Solow 1957). He
further argues that nearly 80% of the growth in labor productivity across the US from 1909 to
1949 was accounted for by a more productive use of capital and acceleration in the skills of
labor through technological advancement.
The effect of firm governance and ownership structure on firm innovation is also highlighted
by both earlier and recent studies (Shleifer 1998) (Porta, Lopez-De-Silanes, and Shleifer 2002);
(Dewenter and Malatesta 2001); (Ayyagari et al. 2011), (Fernandez 2017) and (Aliyu et al.
2019) on how firm performances and firm innovation is influenced by governance and
ownership structure.
In summary, the literature on firm innovation, ownership structure and access to finance
suggests that innovation and funding is critical to firm growth. We examine this hypothesis by
testing the relationship between firm innovation and sources of working capital, market
competition, and firm ownership and governance structure.
DATA SOURCE AND DESCRIPTIVE STATISTICS
The data sources and variable descriptions use in this empirical analysis are discussed in this
section. This study employs firm-level data for manufacturing firms in 32 African countries
from the World Bank’s Enterprise Survey Indicator Database,
https://www.enterprisesurveys.org conducted between 2009 and 2018. The country with the
largest share of firms in the dataset is Egypt (16.08 percent), followed by Nigeria (14.85
percent), and Tanzania (4.51 percent), as presented in table 1. Table 2 and 3 present the
pairwise correlation matrix and summary statistics of key variables of interest. We report that
even though most of the correlation coefficients are statistically significant at 5%, they are
mostly weakly correlated. The mean age of firms is 23.479 year whilst the oldest firm is 120
years old and the youngest is 2 years old. Top managers experience also averages at 16 years.
On the average firm utilize their total capacity at 69.152% and their active average working
hours per week is 64.756 hours.
A set of questions on firm innovation are posed to firm owners whether they engaged in specific
innovative activities. These questions include the number of resources invested in R&D. This
study, however, extends the questions on the firm's innovation activities to the (New Product,
new or significantly improved methods of manufacturing products (New Technology), new or
significantly improved logistical or business support processes (H3), new or significantly improved
organizational structures or management practices (H4a), introduced new or significantly
improved marketing methods (H4b), did this establishment spend on formal research and
development activities, either in-house or contracted with other companies (H5), did this
establishment give employees some time to innovate or try out a new approach or new idea about
the products or services (H6), business process, firm management, or marketing (H7), and other
related innovation questions such as whether the firm has ISO certification (B8) and using
technology licensed from a foreign-owned company (E6), excluding office software); following
(Ayyagari et al. 2011) who argued that innovation in countries located far inside their
production possibility frontier might mostly be imitating and adopting instead of inventing this
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Asiedu, M. (2021). Firm Characteristics, Financing and Firm Innovation in Africa. Archives of Business Research, 9(7). 177-198.
URL: http://dx.doi.org/10.14738/abr.97.10533
study focuses more on the other set of questions asked which are directly link to output than
only R&D spending.
Most importantly, we acknowledge that our sample consists of only African countries that are
predominantly less developed economies and are most likely operating within their frontier.
Also, (Gorodnichenko, Svejnar, and Terrell 2010) argued that using R&D expenditure as a basis
of innovation may be inappropriate. Their reason being that R&D expenditures generate not all
innovations, and formal R&D measures are typically biased against small firms.
METHODOLOGY
The empirical analysis of this study is developed on the latent regression of the form:
�∗ = �#
� + � (1)
Where �∗ is an unobservable index variable, � is a vector of explanatory variables, � is a vector
of parameters, and � is an error term (see, for instance, (Liu 2015), chap. 3 and 11).
For the binary case (Section 4.1), � = 1 (i. e, innovative firm) if �∗ > 0 and � = 0 (i.e., non- innovative firm) if �∗ ≤ 0. For the ordered case where � denotes a firm innovation level,
which ranges from 1 �� �
� = 1if �∗ ≤ �$; � = 2 �� �$ < �∗ ≤ �& , ... . . , � = � �� �()$ ≤ �∗ such that �$ < �& <
⋯ < �()$ are the threshold parameters or cutoffs.
For binary data, the odds ratio of a logit model is given by
�
1 − � = 1 + �*/,
1 + �)*/, = �*/, (2)
The odds ratio represents the probability of success or having an event, �, to the probability of
failure or not having an event (1 − �).
By taking natural logarithm of both sides of Eq. (2), one obtains the logistic regression model
ln ? �
1 − �
@ = �#
� = �$ + �&�& + ⋯ + �-�- (3)
For the ordered model
��(� < �) ≡ �. = ��(�#
� + � < �. = ��(� < �. − �#
�) so that the odds of being at or below
category � is given by
�
1 − � = 1 + �/!)*",
1 + �)(/!)*",) = �/!)*#,,� = 1, ... . (� − 1) (4)
and the ordinal logistic regression can be represented by
ln( �.
1 − �.
) = �. − �#
� = �. − (�$ + �&�& + ⋯ + �-�- ) (5)
� = 1, ... . (� − 1)