Analysis of Working Capital Sources on Firm Innovation, and Labor Productivity among Manufacturing Firms in DR Congo

Abstract

This study identifies the relevant sources of firm working capital and examines their interrelationship with innovation activities and labor productivity among 529 manufacturing firms in DR Congo using the 2013 Enterprise Survey Database. We identify external funding sources as the most crucial funding source for innovation activities among manufacturing firms in DR Congo. We further establish a transmission mechanism of firm innovation through the availability of an active line of credit on firm productivity. Productive firms rely mainly on external funding for their innovation activities. We also show by the technique of propensity score matching, that the Average Treatment Effect (ATE) of R&D spending is positive and statistically significant at 5%. R&D spending impacts labour productivity by nearly 53% higher for firms with R&D spending in the last three (3) years than their counterparts. Similarly, the Average Treatment Effect on the Treated (ATET) is positive and statistically significant at 5%. We report an overwhelming 112% positive effect of R&D spending in the last three (3) years on firm productivity for the treatment group. Further analysis of the business environment shows that the absence of adequately educated labor force, obstacles associated with access to land, illegal activities of competitors, political instability, corruption, and obstacles encountered by firms from the courts and legal systems negatively affects firm productivity. Our key policy recommendation includes: 1) the need for an immediate robust and efficient financial market to channel funding to manufacturing firms, and 2) firm innovation should be the underlying factor in capital allocation.