Access to Financing and Innovation in Small and Medium Enterprises in Vietnam

In this paper, we examine the relation between small and medium-sized (SMEs) capacity to access external capital and innovation in Vietnam. We find that SMEs with a high debt ratio tend to be more innovative. After controlling for several firm characteristics, long-term debt remains significantly and positively correlated with innovation. We further show that both bank loans and loans from family and friends help SMEs innovate, especially in developing new products or technologies. Overall, our paper shows that external financing plays an important role in enhancing innovation in SMEs.