Discussion Paper No. 274 of 2021 on Effects of Finance Sources on Innovation Activities in Manufacturing Sector in Kenya

Abstract

Innovation in the manufacturing sector is influenced by several factors, including the source of finance. In Kenya, financing of innovation activities has been lacking due to limited financial systems and market to fund innovation, yet innovation produces positive spillover effects to the economy. This study sought to determine the effects of financing sources on innovation activities among manufacturing firms in Kenya. Product, process and market innovation were considered due to their critical importance to competitive outcomes and expansion of the firm. Data from 455 manufacturing firms in Kenya as captured in the World Bank Enterprise Survey was used in this study. Logit regression models were used in the study using Stata software for explanatory variables to measure the effect of explanatory variables on firm innovation activities. The results showed that firms that use internal finance were less innovative, while those that use bank finance, non-bank, credit, government, and SACCO had a positive and significant product, process and market innovation activities among manufacturing firms in Kenya. Other firm characteristics such as size and age of the firm showed a positive influence on firms being innovative if they access their working capital from external sources. Policy makers should ensure review of legislation to attract firms to external sources of finance by coming up with financing products targeted to manufacturing firms. To help small and medium manufacturing firms, policy should be enacted to ensure smooth financing to the industries. Further, there is need to consider fast-tracking the adoption of proposed credit guarantees scheme regulation, which seeks to promote access to quality and affordable credit to micro, small and medium enterprise (MSMEs) and to alleviate the challenges faced by MSMEs while seeking credit