• International Journal of Technology (IJTech)
  • Vol 13, No 2 (2022)

Credit Constraints and Innovation Activities: Empirical Evidence on Russian Enterprises

Credit Constraints and Innovation Activities: Empirical Evidence on Russian Enterprises

Title: Credit Constraints and Innovation Activities: Empirical Evidence on Russian Enterprises
Ali Maarouf, Olga N. Korableva

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Cite this article as:
Maarouf, A., Korableva, O.N., 2022. Credit Constraints and Innovation Activities: Empirical Evidence on Russian Enterprises. International Journal of Technology. Volume 13(2), pp. 254-263

Ali Maarouf St. Petersburg State University, 199178 St. Petersburg, Russia
Olga N. Korableva St. Petersburg State University, 199178 St. Petersburg, Russia.
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Credit Constraints and Innovation Activities: Empirical Evidence on Russian Enterprises

This article studies the relationship between the credit constraints on Russian enterprises and their decision to introduce product innovation, process innovation, and to spend on research and development (R&D). The evidence regarding the relationship between R&D spending remains somewhat ambiguous and could differ between countries. A cross-sectional macro dataset of the World Bank Enterprises Survey in Russia in 2019 is used in a system of seemingly unrelated regressions. The results show that the existence of credit constraints is associated with a lower probability of introducing product innovations and spending on R&D activities. Nevertheless, there is no significant relationship between being credit constrained and the enterprise decision to introduce process innovations. The importance of this article stems from the fact that previous works showed that these relationships differ by country and that these relationships are considered simultaneously, while other works concentrate mainly on one of these relationships.

Credit constraints; Financial constraints; Innovation activities; Research and development; World Bank Enterprises Survey


Innovation activity is considered to be one of the main drivers of economic growth on the national level (Aghion et al., 2009; Solow, 1957). Innovations are of great importance for company growth and competitiveness. Companies develop new products and processes or improve old ones to maintain and increase their productivity and market share (Berawi, 2016, 2017; Dabla-Norris et al., 2012; Leland & Pyle, 1977). However, many factors could hinder investment in innovation activities, particularly in R&D activities. Innovation projects require high sunk costs, especially projects containing R&D activities that could require large investments in their initial stages (Alderson & Betker, 1996). In addition to research activities, numerous other activities are necessary to develop new products and release them to the market, which creates a large time lag between investing in these projects and starting to get a return on such investments. This time lag discourages banks from giving companies credit to finance their innovative projects (Bakker, 2013).

Other factors that hamper investing in innovation activities include the inherent high level of uncertainty in such projects. Many technological, strategic, and market factors lead to uncertainty. Innovative companies do not have enough information about the activities of their rival companies or about the readiness of the market to accept their new products (Spielkamp & Rammer, 2009). Innovation projects usually result in intangible assets, for instance, patents, utility models, or even the new knowledge and experience of the company personnel. Such assets cannot be used as collateral to obtain credit from banks (Hall, 1992). Additionally, different participants in the innovation activities have a different level of information about the innovation itself, which leads to the problem of asymmetric information. The company management or innovators have more information about their new products than investors. Innovators also tend not to reveal many details about their innovation because of the appropriability problem whereby other rival companies could benefit from this information (Leland & Pyle, 1977). As a result, the problem of asymmetric information discourages investors from participating in innovative projects (West, 2004).

The aforementioned factors lead to constraining the access of innovative companies to external financial resources. Thus, constrained companies tend to reduce or stop their investment in innovation activities, which influences their competitiveness and productivity. It is worth mentioning that the boom in R&D spending in the USA in the 1990s can be attributed to a shift in the supply of finance (Brown et al., 2009). Therefore, the underinvestment of a huge number of companies in innovation activities could influence the innovation development of the country and its economic growth (Brown et al., 2012).
    This paper aims to analyze the mutual relationships between credit constraints and the enterprise decision to introduce product innovation, process innovation, and to spend on R&D internally or externally. The relevant scientific literature concentrates on the relationship between financial constraints and R&D spending or between financial constraints and product innovation in particular. The importance of this work stems from two facts. First, the considered relationships are significantly different by country, and it is important to study these relationships in the context of an emerging economy like Russia, where credit financing is considered to be the main external financial resource for  Russian enterprises (Guriev et al., 2004). Second, this paper considers the relationship between credit constraints and the enterprise decision to introduce product innovation and process innovation and to spend on R&D simultaneously. Thus, it will be possible to compare the significance and magnitude of these three relationships.


Applying a system of simultaneous seemingly unrelated regressions led to the conclusion that credit constraints are negatively correlated with the decision of the company to introduce new products or to spend on R&D internally or externally. Such a relationship has not been observed between credit constrained and introducing process innovation. The development of new products and spending on R&D activities require large investments from enterprises. Financially constrained enterprises may not have enough resources to invest in such activities. Meanwhile, the enterprise decision to introduce process innovation, which needs less investment, is not correlated with credit constraints. It is worth noting that the correlations between credit constraints and both product innovation and R&D spending are of the same size, while not all enterprises that introduced a product innovation decided to spend on R&D. This means that the existence of financial constraints led companies to avoid activities that require high investments or that associated with high risks. Process innovations are less risky and do not require large investments, so the enterprise can introduce them whether or not it is constrained.

      These results have many policy implications, especially considering the notion that credit finance is not vital for innovation activities. Government endeavors should be evenly directed to support enterprises’ access to external financial resources in order to increase their ability to spend on R&D and to introduce product innovations. This support should be directed evenly to help enterprises to develop new products and to engage in R&D activities such that enterprises under credit constraints are equally inclined to undertake such activities. Among the main limitations of this work was the absence of panel data to consider the relationships over time and to check the causality relationship. Is there only a correlation between credit constraints, product innovation, process innovation, and R&D spending? Or does limited access to external financial resources lead companies to decide not to introduce new product innovations and not to spend on R&D?


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