Fact of the Week: In Developing Countries, Increasing the Availability of Bank Credit Raises the Probability a Firm Will Invest in R&D by 7.6 Percent

Strong private investment in R&D is key to productivity growth, so economic development policies should encourage businesses to undertake these investments. One way is to increase the availability of credit to businesses. When it becomes easier for a company to borrow money, it also becomes easier to afford investing in R&D.

In an economic working paper, French authors Edward Lorenz and Sophie Pommet analyzed four years’ worth of banking and innovation data across 36 developing countries in Africa and Asia. One of their findings was that adding 10 more bank branches per 100,000 adults increases the probability that businesses will invest in R&D by 7.6 percent. They also conclude that up to 20 percent of the difference in innovation levels among certain developing countries can be explained by the difference in sophistication of the banking systems in these countries.