Exploring funding channels and innovation in Colombian SMEs: Insights from the service sector

This paper examines how financing channels, capital structures, and asset investments influence innovation outcomes in service-sector SMEs in Colombia. Despite extensive research on innovation finance, most studies focus on manufacturing firms in OECD economies, leaving a gap regarding the dynamics of service-sector SMEs in emerging markets. Using data from the national EDITS 2020–2021 survey, we analyze a sample of 384 innovative firms through ordered logit models. The results show that internal financing is the most frequently used channel but primarily sustains low levels of innovation, with limited effects on high-level outcomes. Public funding is positively associated with medium innovation but negatively linked to high innovation, while private external funding follows a similar pattern. Cooperative financing has the strongest negative impact on advanced innovation, highlighting the risks of informal financial mechanisms. Regarding asset composition, tangible investments foster incremental and medium-level innovation, whereas intangible investments—such as R&D, skills development, and organizational knowledge—significantly increase the probability of high innovation. These findings contribute to the literature on innovation finance in emerging economies by demonstrating that resource composition and institutional context critically condition SMEs’ innovation trajectories. From a policy perspective, the results suggest that supporting intangible assets, strengthening absorptive capacities, and diversifying financial ecosystems beyond traditional credit lines are essential to enable SMEs in Colombia and similar contexts to transition from incremental to high-level innovation.