Formal and informal ways of financing SME innovation in emerging markets. A quantitative study on formal and informal credit as well as connected institutions.
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2019-07-08
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en
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Extant literature establishes that firm innovation in developed markets is driven by access to external finance provided by well-performing formal institutions, but does not detail whether these mechanisms hold true for SMEs in emerging economies, that are characterized by “institutional voids” and informal contexts. In this study, a formal and informal way of financing SME-innovation were researched, as well as the interaction with the quality of their respective institution. Results were primarily derived from the World Bank Enterprise Survey (WBES) using multilevel logistic regression. Firstly, formal credit delivered by a bank was assessed, and the associated quality of the national money market. Second to be examined was informal credit delivered by a Rotating Savings and Credit Association (ROSCA) – a communal fund that periodically distributes a lumpsum of contributions among its members - and the associated quality of ROSCA-management as proxied by national trust in people known personally. This study provides strong evidence that both bank and ROSCA-credit increase firm innovativeness, although entrepreneurs that use both types of credit simultaneously benefit most, as they are successfully embedded in both a formal and informal context. Furthermore, some evidence is found for a positive relationship between ROSCA-management and its innovative outcomes, confirming trust is an important concept in ROSCAs. Some evidence is too found for a negative effect of money market quality on the innovative performance of formal credit users, suggesting scarcer credits may be more valuable, and well-performing firms are better equipped to obtain it. This study is the first to deliver a large-scale empirical validation of the ROSCA.
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Faculteit der Managementwetenschappen