Journal of Financial and Quantitative Analysis

Research Articles

Firm Innovation in Emerging Markets: The Role of Finance, Governance, and Competition

Meghana Ayyagaria1, Asli Demirgüç-Kunta2 and Vojislav Maksimovica3

a1 School of Business, George Washington University, 2201 G Street NW, Washington, DC 20052.

a2 World Bank, 1818 H Street, NW, Washington, DC 20433.

a3 Smith School of Business, University of Maryland, Van Munching Hall, College Park, MD 20742.


We investigate the firm characteristics associated with innovation in over 19,000 firms across 47 developing economies. While existing finance literature on innovation is limited to large public firms in developed markets such as the United States, our database includes public and private firms, and small and medium-sized enterprises. We define innovation broadly to include introduction of new products and technologies, knowledge transfers, and new production processes. We find that access to external financing is associated with greater firm innovation. Further, having highly educated managers, ownership by families, individuals, or managers, and exposure to foreign competition is associated with greater firm innovation.

(Online publication June 01 2011)


This research was supported by a grant from the National Science Foundation (NSF). We thank Hendrik Bessembinder (the editor), Amit Seru (the referee), Krishnamurthy Subramanian, L. Alan Winters, Bernard Yeung, and seminar participants at the 2008 American Economic Association/Association of Financial Economists (AEA/AFE) Conference in New Orleans for useful discussions. This paper’s findings, interpretations, and conclusions are entirely those of the authors and do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent.