Does Access to Finance Enhance SME Innovation and Productivity in Nigeria? Evidence from the World Bank Enterprise Survey

Abstract

ABSTRACT The primary link between financial institutions and economic performance is the provision of resources by these institutions to businesses in order to drive enterprise development. In this study, the role of access to finance in enhancing innovation and productivity among Nigerian small and medium‐sized enterprises (SMEs) is investigated using the World Bank Enterprise Survey (ES) dataset. Access to finance is categorized as external and internal to the firm. Using the logit estimation technique, the study finds that ease of accessing bank credit is the strongest positive force in driving all types of innovation among SMEs in Nigeria. In the same vein, the source of investment financing matters in terms of how it affects innovation: both internal and external sources improve investment in product, process, and organizational innovation, but only external financing has a significant effect on R&D spending and use of foreign licensed technology. Overall spending on R&D is only driven by access to external finance by the SMEs. The study also shows that increased access to finance may actually lead to productivity decline among SMEs in Nigeria.