Second, the surveys have detailed information on the extent of innovation that the firms undertake. Previously, there has been very little consistent data across countries on the nature of innovative activities undertaken by firms. Moreover, the available data typically covers only the developed countries and focuses on patents and R&D expenditures where as new-to-firm innovation (e.g. new product introductions or use of new technologies) is of more relevance for our sample of developing countries where firms are less likely to develop globally new technologies. Murphy, Shleifer, and Vishny (1993) also highlight the importance of new-to-firm innovation by arguing that innovators need government-supplied goods such as permits and licenses more than established producers and hence are particularly subject to public rentseeking.<sup>14</sup> To capture firm innovation we use a dummy variable, **New Product Innovation,** which takes the value 1 if the firm developed a new product line and 0 otherwise. While new product innovation is our main measure of innovation, as robustness we also use nine other indicators that capture firm innovation and dynamism in a broader sense - _Upgraded an existing product line, Introduced new technology that has substantially changed the way that the main product is produced, Opened a new plant, Agreed to a new joint venture with a foreign partner, Obtained a new licensing agreement, Outsourced a major production activity that was previously conducted in-house, Brought in-house a major production activity that was previously outsourced_ , and two aggregate indicators, _Core Innovation_ that captures introduction of a new product, upgraded an existing product line and introduced new technology and _Dynamism Index_ which includes all of the individual innovation indicators above.

We use three measures of external finance. **Bank Financing** is a dummy variable that takes the value 1 if the firm reported having a current bank loan or overdraft facility and 0 if the firm said it did not currently have access to a bank loan or overdraft facility. While there is no complementary variable defined for informal finance, the survey also asks firms to report the sources of financing for their new investments and working capital. Hence we construct

> 14 The ES surveys are unique in that they cover mainly developing economies and allow for a broader definition of innovation, to include not only core innovative activities such as the introduction of new products and new technologies, but also other types of activities that promote knowledge transfers such as signing joint ventures with foreign partners or obtaining new licensing agreements, and other actions that adapt the organization of the firm’s business activities such as opening a new plant or outsourcing a productive activity. The definition in the ES surveys aligns closely with that in the _Oslo Manual_ that articulates the OECD/Eurostat definitions of innovation. See Schumpeter (1942), Segerstrom (1991), Grossman and Helpman (1991), Acemoglu, Aghion, and Zilibotti (2006), Ayyagari, Demirguc-Kunt, and Maksimovic (forthcoming) for highlighting the importance of thinking about innovation broadly in developing countries.

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