IMF Working Papers

We study 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. Moreover, 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.