Abstract
This paper investigates the relationship between the capacity of small- and medium-sized enterprises (SMEs) to access external capital and their innovation activities in Vietnam. Our findings reveal that SMEs with higher external financing capacity, as measured by debt and loan ratios, are more actively engaged in innovation. Even after controlling for various firm characteristics, long-term debt remains significantly and positively associated with innovation. Additionally, we demonstrate that both bank loans and informal loans from family and friends play a crucial role in fostering SME innovation, particularly in the development of new products and technologies. Overall, our study highlights the critical role of external financing in driving innovation among SMEs in Vietnam.