Assessing the Innovation-finance Nexus for SMEs: Evidence from the Arab Region (MENA)

SMEs in the Arab region are widely viewed as important for their multiple roles, notably in employment creation. Yet, they consistently encounter several constraints such as financing, which impede innovation, growth and internationalisation. This paper examines the external finance-innovation nexus for SMEs operating in five non-oil Arab countries—Egypt, Jordan, Lebanon, Morocco and Tunisia. To achieve this, a probit regression with instrumental variables is applied to firm-level data from the World Bank Enterprise Surveys. The primary findings reveal that the external finance providers are more likely to be reluctant to fund SMEs’ innovation; yet, it thrives with finance. The findings accord with the hypothesis that the accessibility to external funds is a mainstay of SMEs’ innovation. There is a need to develop policies that support equity and debt capitals for innovative SMEs.