Competition, Access to Finance, and Manufacturing Firm Innovation Behavior
Description
This study examines the innovation behavior of manufacturing firms amidst competition from the informal sector and access to finance by Ugandan firms. It further analyzes the capital structure of innovating firms and whether it follows a pecking order. The following research questions are addressed: (1) Does competition from the informal sector affect the manufacturing firm’s innovation behavior? (2) Does the source of financing affect the innovation behavior of manufacturing firms? To answer these questions, the study used data obtained from the World Bank Enterprise Survey (WBES) on Uganda (https://www.enterprisesurveys.org) collected for the year 2013. This survey is the most recent dataset available for Uganda. To access the dataset, you must register with the Enterprise Analysis Unit by completing the Enterprise Surveys Data Access Protocol. The WBES collects data on manufacturing firm characteristics in Uganda, including access to finance, informality, innovation, infrastructure, and competition. The WBES methodology comprises a stratified random sampling strategy where the three strata are size, sector, and location. The study population comprises all manufacturing establishments (with >1% private ownership) with more than five employees according to the group classification of ISIC Rev 4. codes 10-33. The dependent variable “Innovation” is measured in four main categories of firm innovativeness: product, process, organization, and marketing innovations. For all four measures of innovation, firms responded to questions such as, has the firm introduced new products, processes, organizational, and marketing methods over the last three years with 1(Yes) and 2(No). The main independent variable is financing of the establishment’s working capital. The respondents were required to estimate the working capital financed from; internal funds; borrowed from banks; borrowed from non-bank financial institutions; purchases on credit from suppliers and customer advances; or other money lenders, friends, relatives, etc. The study includes other variables that could influence firm innovation as control variables. These include firm size; informality - a variable questioning whether the firm competes against unregistered or informal firms with 1(Yes) and 2(No); R&D expenditure (in-house or contracted) with 1(Yes) and 2(No); whether the firm gave employees time to develop new ideas for product, processes, organizational, or marketing innovation with 1(Yes) and 2(No); and whether the firm formally registered when it began operations with 1(Yes) and 2(No). Results indicate that competition from the informal sector reduces firm innovation. Internal funds enhance product and process innovation, while non-bank institution financing negatively affects product, organizational, and marketing innovation. The results validate the pecking order theory, indicating firms use internal resources before external sources like debt or equity for innovation funding.