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ABSTRACT Innovation in small and medium‐sized enterprises (SMEs) is a key driver of sustainable and quality development in Africa. This study investigates the impact of financial constraints and the business environment on SME innovation in sub‐Saharan Africa. The data used in this research come from the World Bank Enterprise Survey (WBES) conducted in 2022 and 2023 on a sample of 1685 SMEs in eight African countries. A composite index of the business environment was constructed based on firms' subjective assessments of the constraints they faced, using a principal component analysis (PCA) method. Probit model estimation shows that financing constraints negatively affect product innovation, whereas their impact on process innovation is more nuanced. Interestingly, a less favorable business environment appears paradoxically to encourage product innovation. The findings also reveal that investing in research and development (R&D) positively affects both types of innovation. This study contributes to institutional theory by highlighting that institutional weakness can, under certain conditions, be leveraged to stimulate SME innovation. It also calls on policymakers and SME leaders in sub‐Saharan Africa to rethink investment strategies to more effectively overcome constraints and stimulate innovation.
ERIOLA Akitola Jesse (Mon,) studied this question.