Research purpose:
This study examines how innovation influences borrowing behavior among small and medium-sized enterprises (SMEs) in 19 Asian countries, focusing on discouraged borrowing – when firms avoid applying for credit due to fear of rejection.
Research motivation:
Discouraged borrowing is a hidden form of financial exclusion that constrains SME growth. While widely studied in Europe and advanced economies, evidence for Asia remains limited despite distinct financial infrastructures and institutions. This study tests whether innovation reduces discouragement and whether firm size moderates this relationship
Research design, approach, and method:
Using pooled cross-sectional World Bank Enterprise Surveys (2013 – 2024) covering 12,000+ SMEs across 19 Asian economies, we estimate logistic regressions with extensive controls and country – industry – year fixed effects, include interaction terms for firm-size heterogeneity, and run robustness checks by income group and separately for product and process innovation.
Main findings:
Innovation intensity significantly reduces discouraged borrowing, supporting its role as a positive signal of competitiveness and growth potential. The effect varies across firm sizes – strongest for large firms – yet benefits are evident for SMEs overall. Robustness checks confirm consistency across upper- and lower-middle-income economies and show that both product and process innovation independently lower discouragement.
Practical implications:
Policies should strengthen innovation as a credible financing signal. Governments can expand innovation funds and credit guarantees to support smaller firms, while lenders tailor products for innovative SMEs. Because both product and process innovation reduce discouragement, support should span a broad range of innovation activities, alongside stronger credit information systems – especially in lower-middle-income countries – to promote financial inclusion.