Innovation helps spur rural economies, but a new study led by researchers at Penn State found that while firms incorporating innovation into their business model had higher credit application rates, they were less successful in receiving loans, especially in rural areas.
Published in the December issue of the Finance Research Open journal, the study examined how various types of innovation — including technology, goods, and service innovation — influence a firm’s likelihood of applying for credit, being approved, and receiving the requested loan amount.
Researchers analyzed data from 161,500 U.S. firms using the 2021 Annual Business Survey, conducted by the U.S. Census Bureau and the National Center for Science and Engineering Statistics within the National Science Foundation. The survey included information on credit applications from 2018 to 2020.
The findings show that innovative firms were 51 percent to 90 percent more likely to apply for credit, but had 24 percent to 39 percent lower odds of receiving their requested loan amounts compared to non-innovative firms.
The pattern held true in both rural and urban areas, despite more financing options being available in cities, according to Luyi Han, assistant professor of agricultural and regional economics in Penn State’s College of Agricultural Sciences and the study’s lead author.
“Targeted policy interventions are needed to bridge this gap,” Han said. “For example, public loan guarantees help reduce lender risk, and certification programs could help validate innovative firms’ creditworthiness.
“Enhanced evaluation methods could also incorporate both traditional financial metrics and innovation-specific indicators,” he said.
Rural communities, which account for about 20 percent of the U.S. population, face persistent economic challenges, such as population decline and limited industry diversity.
Innovation, the study noted, is vital for these communities’ resilience — allowing firms to adapt to market changes, create higher-value products, and generate local employment.
“The data show that 5 percent to 6 percent of rural firms engage in innovation activities, demonstrating that innovation does occur outside major metropolitan areas,” Han said. “But these rural areas lack alternative financing sources, like venture capital and angel investors, that are available in urban markets.”
While extensive research exists on general capital access issues, he added, the specific challenges faced by innovative rural businesses remain understudied in the U.S.
Han noted that information asymmetry may partly explain why innovative firms are more likely to apply for credit but are less likely to be approved for the full amount.
“The uncertainty and complexity of innovative activities make it more difficult for banks to assess default risk of a loan, leading to credit rationing where lenders limit loan amounts rather than adjusting interest rates,” he said. “Because urban innovative firms also experienced credit rationing in the analysis, it appears that deeper credit markets alone do not solve the fundamental problem of evaluating innovative firms’ creditworthiness.”
The researchers said that in the future, additional studies could explore different financing sources — such as venture capital, loan guarantees and government grants — to explicitly analyze the differences in innovation and investment financing.
The study received support from the U.S. Department of Agriculture’s National Institute of Food and Agriculture, the National Science Foundation, the Oak Ridge Institute for Science and Education, and Penn State’s College of Agricultural Sciences.