Innovation investment is a key driver to enhanced competitiveness and economic growth. Global value chain participation fosters innovation in two ways. It results in technological, financial, and industrial upgrading derived from technology and knowledge transfer, but it also allows suppliers to innovate, taking advantage of opportunities in the local context. However, financial constraints hinder innovation investment, thus impeding firms from fully profiting from introducing new products to the market and new processes to the operation. This is particularly relevant in the case of small and medium enterprises. Given the importance of small and medium enterprises in employment and economic development, this study's results offer practical recommendations for global manufacturers, suppliers, and policymakers to mitigate financial constraints, improve supply chain efficiency and promote innovation-led growth. Using firm-level data from the World Bank Enterprise Survey, this study investigates the relationship between global value chain participation and innovation and financial constraints and innovation. The engineering econometric investigation suggests a higher probability of innovation investment when firms participate in global value chains and a negative probability when firms are financially constrained, significantly affecting small firms in middle-to lower-income economies. The contribution of this study is threefold. First, it offers a transdisciplinary overview of how financial constraints affect suppliers' innovation investment decisions. Second, it provides empirical evidence to validate how global value chain participation promotes innovation investment and how financial constraints hinder it. Third, it offers actionable implications on how targeted financial tools can improve innovation capacity in small enterprises.
