The Link between Financing Decisions and Investment in Research and Development in Kenya

Abstract

Abstract

This paper examines the link between firm financing decisions and investments in research and development among Kenyan firms. Thus, we investigate which financing source is more likely to trigger firms to invest in research and development and whether other firm characteristics are important. We employ the logistic regression methods using the 2019 World Bank Enterprise Survey data for Kenya. The results of the study suggest that the use of bank and non-bank debt to finance investment tends to increase firm’s initiative to invest in research and development as compared to those firms that rely on internally generated finance. In addition, larger and more profitable firms are more likely to invest in research and development, as compared to smaller and poor performing firms. While firms are reluctant to use money borrowed from friends and relatives to carry out R&D, such firms are willing to money borrowed from the government for the same. We argue that MSMEs may not use funds borrowed from family and friends to carry out R&D due to short repayment periods and high risk of default but are free to use government funding for R&D since it comes with many concessions and minimal risk of default.