DOI: 10.52340/ekonomisti.2026.01.15

Expanded Summary

Innovation is the key driver of economic growth, long-term development and sustainability. For emerging economies, fostering innovation is notably challenging due to institutional, organizational and financial risks. Unlike developed countries, where access to venture capital markets and innovation support systems are well established, developing economies face volatile macroeconomic conditions that influence innovation outcomes and technology commercialization process. The relationship between financial decisions and innovative processes remains context-dependent. Therefore, this paper integrates the concepts of corporate finances, innovation management and institutional economics to demonstrate the link between finances and innovation mediated by institutional quality, governance and cultural settings towards risk and uncertainty.  Theoretical review reveals that in developing economies financial decision-making is a strategic determinant of innovation capacity. Drawing on various theories of finance and innovation, this article provides a conceptual framework showing the relationship between finances, innovation and sustainable competition. Moreover, it demonstrates that in developing economies the link between finance and innovation is significantly modified by institutional mediation and by contextual factors, such as the quality of governance, regulatory frameworks, the level of financial development, as well as macroeconomic stability, and others.  Number of scholars emphasize the crucial role of financial strategies on innovation development in developing countries, hence, highlighting the significance of this topic.

This article discusses the main theories of financial decisions (Modigliani-Miller’s Capital Structure Theory, Pecking Order Theory, Trade-off Theory, Financial Constraints Model) and evaluates its applicability in the context of developing economies. According to Modigliani-Miller theory, the capital structure is the optimal mix of debt and equity, and under the tax regime, debt provides a tax shield that increases the company’s value. However, such assumption does not hold true in developing economies, as the regularities of financing behavior are disrupted by asymmetric information, high cost of capital, and credit rationing. Similar views are shared by “Pecking Order” and “Financial Constraints” theories. These models use asymmetric information and liquidity problem to explain why companies rely on internal and informal financing, which in turn, leads to the restriction of long-term innovative investments and results in the dominance of self-financed innovations and underdevelopment of credit markets. In addition, a lack of proper credit history, makes borrowing a real challenge for the firms.

The particular attention is paid to innovation theories, including Schumpeter’s “Creative Destruction”, evolutionary and open innovation approaches, Barney’s Resource-Based View and the dependency on absorptive capacity. Institutional and Governance theories, in turn, highlight the environmental conditions that determine the effectiveness of financial decisions and the success of innovative processes.

A qualitative comparative-analytical approach is applied with a focus on two main regions: Southeast Asia (Indonesia, Vietnam, Philippines, Thailand) and Sub-Saharan Africa (South Africa, Kenia, Nigeria, Ghana). These countries were selected due to their common structural challenges and different levels of institutional maturity. The analysis shows that despite financial constraints, there are significant differences between these regions in terms of institutional environment, governance quality and innovation policy, that ultimately reflects the outcomes of innovation strategies.

Research findings demonstrate that in Southeast Asian countries, institutional mediation more effectively links financial decisions with innovative investments in such a way, that strong governance, coordinated financial instruments, and a stable regulatory environment reduce risks, increase access to capital and ensure the implementation of long-term innovative projects.  State-backed financial institutions, Hybrid financial systems and coordinated innovation policies enable companies to manage financial risks and implement long-term innovation strategies. In contrast, Sub-Saharan African countries are characterized by weak capital markets, high interest rates, and institutional fragmentation that limits the role of financial decisions on innovation development. As a result, innovation often takes an adaptive and cost-effective form and is less directed toward large-scale technological transformations.

The study concludes that financial decisions and innovations are closely related, although their interaction is substantially dependent on the institutional context. Institutional mediation serves as a key mechanism that determines the availability of financial resources, risk management, and the realization of innovative opportunities. The same financial strategy yields different results in different institutional environments, which underscores the importance of context-specific policies and governance. Innovation theories present innovation as a recurring process that requires constant financial support, while institutional theory considers external factors that determine financial and innovative behavior.

The scientific value of this paper lies in its proposal of an integrated conceptual framework that unifies financial, innovative and institutional factors, and provides a more in-depth explanation of innovation implementation in the context of developing economies. A comparative analysis of countries reveals that the mediation of financial institutions is a determining factor in the development of innovation in emerging economies, however, their successful implementation depends not only on the quality of internal management, but also on institutional governance and risk assessment culture. The findings can be used by researchers as well as by policymakers and practitioners interested in strengthening innovative ecosystems and promoting sustainable economic development.