Credit and Product Innovation in Emerging Markets: Evidence from India
IMF Working Papers, September 26, 2025
Source details
- Canonical URL
- Credit and Product Innovation in Emerging Markets: Evidence from India
Other formats
Bibliographic details
- Authors: Siddharth George, Divya Kirti, Nils Olle Herman Lange, Maria Soledad Martinez Peria, Rajesh Vijayaraghavan
- Published: September 26, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229026475.001
Summary
- Study of how access to bank financing affects product innovation in a developing country context by analyzing a reform that broadened credit eligibility for many small Indian manufacturing firms.
- Newly eligible firms borrow more but, on average, do not introduce new or more complex products or expand product scope.
- Many firms appear to operate below efficient scale and use credit to expand existing product lines rather than innovate.
- Most firms face several additional barriers that weaken the impact of credit on innovation.
- Among firms that do not face these additional barriers, credit access boosts innovation, as in advanced economies.
Key findings
- Newly credit-eligible firms increase borrowing following the reform.
- On average, increased credit access does not lead to:
- introduction of new products,
- introduction of more complex products,
- expansion of product scope.
- A substantial share of firms operate below efficient scale and allocate additional credit to expanding existing product lines rather than to product innovation.
- Multiple additional barriers at the firm level dilute the causal impact of credit on innovation.
- Conditional on the absence of these additional barriers, credit access has a positive effect on product innovation, consistent with evidence from advanced economies.
Mechanisms and heterogeneity
- Scale constraints: many firms operate below efficient scale, limiting the returns to investing in product innovation.
- Credit allocation: firms use additional financing primarily to expand current product lines instead of developing new or more complex products.
- Barrier interaction: the presence of several additional obstacles (not enumerated in the summary) weakens the transmission from credit access to innovation.
- Heterogeneous effects: firms without the additional barriers exhibit innovation responses to credit similar to those observed in advanced economies.
Policy implications and research directions
- Expanding credit eligibility alone may be insufficient to spur product innovation among small manufacturing firms in emerging markets.
- Complementary measures addressing noncredit barriers (including those that prevent firms from reaching efficient scale) are likely necessary to translate increased credit access into product innovation.
- Targeted interventions for firms already positioned to overcome additional barriers could yield innovation gains comparable to advanced-economy outcomes.
- Further research could identify the specific additional barriers and the most effective complementary policies to enhance the innovation impact of credit access.
By Siddharth George, Divya Kirti, Nils Olle Herman Lange, Maria Soledad Martinez Peria, and Rajesh Vijayaraghavan; IMF Working Paper No. 2025/192; September 26, 2025; Pages: 71; DOI: https://doi.org/10.5089/9798229026475.001
Content in this bundle
- Working Paper