Finance and Innovation: Country-level Evidence on Role of Firm Size and Competition

With the increased globalization, the production processes are fragmented and the size of the firm tends to shrink under more competitive environment all over the world. Intuitively, it is assumed that small firms face much competition than the larger one that could raise innovation and receive less external finance for the same. They together seem to be suggesting a positive relationship between size and innovation. The present study intends to investigate this issue based on the World Bank Enterprise Survey data for 36 countries. It is observed that large firms are found to be more innovative compared to the smaller ones. Moreover, competition plays a positive role in innovation in all the size ategories. On the other hand, except bank finance, none of the external sources of finance has significantly contributed to the firm innovation effort. It is also noteworthy to mention that the non-institutional finance, which is supposed to be a potential source of finance for small firms, is so meagre to play a significant role in the innovation process of those firms.

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