Unlocking innovation: The role of financial development in driving corporate innovation in developing economies

In an era defined by rapid technological advancements and the ceaseless evolution of financial markets, the nexus between financial development and corporate innovation emerges as a pivotal enigma, driving corporate competitiveness and technological development. This paper explores the nexus between financial development and corporate innovation among developing economies. We used firm-level and country-level data to study financial development and business innovation. Our analysis used almost 24,000 observations from developing economies. We used two levels of econometric approaches to quantify the nexus between financial development and corporate innovation. First, we used probit regression models. Second, to address the endogeneity issue, we implemented ordered probit regressions using instrumental variables and Sargan statistics to verify the validity of instrumental variables. The findings highlighted that well-structured financial institutions boost corporate innovation. Moreover, the ease of access to finance and strong financial market development also stimulate corporate innovation. These results suggested that the development of financial markets is essential in providing funds and other related services and fostering innovation. Financial development and corporate innovation can create and implement sustainable technology, processes, and business models in developing economies.