Economic Study on Determinants of Innovation Activities: The Case of Ethiopian Manufacturing Sector

Abstract

Innovation positively affects different aspects of firm performance. More specifically, innovative firms are likely to enjoy production, market and revenue growth, regardless of the industry in which they operate. There are financial and non-financial factors that constrain the ability of enterprises to innovate successfully. This paper primarily investigates the effect of internal and external financial constraint on the likelihood of abandoning or not stating innovation activities in the Ethiopian manufacturing sector. In the empirical analysis, we used the Ethiopian innovation survey data collected for the period from 2012 to 2014. We use the recursive bivariate probit model to take into consideration the simultaneity of the decision to abandon innovation projects and the probability to face financial constraint. Our result shows that a lack of external finance, lack of information on technology and perception of no demand to innovation mostly affect the decision to abandon innovation at the concept stage, to seriously slow down, and not to start innovation projects, respectively. Moreover, firms engaged in acquisition of machinery and equipment are more sensitive to a lack of finance as their size gets smaller. The result of the study will contribute to make informed policy decision.