External supports, innovation efforts and productivity: Estimation of a CDM model for small firms in developing countries

•We estimate the relationships between knowledge inputs, innovation outputs and productivity of small and medium-sized enterprises in developing economies.•The estimation integrated the impacts of various sources of external financial supports into the innovation-productivity nexus.•The econometric results of the Crepon, Duguet, and Mairesse (CDM)model show that funds from state, federal and foreign governments have heterogenous impacts on R&D investments and productivity.•Other firm-level determinants such as innovation cooperation, human capital, export activities, firm age and size influenced the innovation activities and productivity. Financial constraints have been identified as a major drawback of innovation activities and productivity of small entrepreneurial firms, especially in developing countries. While external financial supports provide incentives for innovation, we know much less about their effects in the context of developing market firms. This paper fills this research gap by proposing a modified version of the Crepon, Duguet, and Mairesse (CDM) model that estimates the effects of funds from the state, federal and foreign governments on innovation activities and productivity of small and medium-sized enterprises. We test the model on a firm-level dataset based on two waves of Nigeria innovation survey (NIS). The econometric results reveal that these sources of financial supports have heterogeneous effects on the knowledge input, innovation outputs and productivity. In addition, firm-level factors, in particular, innovation cooperation, human capital, export activities, firm age and size have considerable impacts on innovation capacity and firm productivity.