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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.

The study, published in the journal , examined how different types of innovation in a business—technology, goods and service innovation—affect both the likelihood of the business applying for credit and how much credit was received.

The study examined three distinct stages of credit access: whether firms apply for credit, whether they receive any credit at all, and how much of their requested amount they actually receive. While innovative firms actively seek financing more often than their traditional counterparts, lenders systematically provide them with less funding than requested.

The researchers found that innovative firms had 51% to 90% higher odds of applying for credit but 24% to 39% lower odds of receiving their requested amounts compared to noninnovative firms. This was true in both rural and urban areas, despite more credit being available in urban areas.

Luyi Han, assistant professor of agricultural and regional economics in the College of Agricultural Sciences and the lead author on the paper, said the findings suggest that addressing rural innovation financing requires targeted interventions rather than simply increasing overall credit availability.

"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."

Rural areas represent approximately 20% of the U.S. population, the researchers said, and face unique economic challenges including population decline and limited economic diversification.

According to the researchers, in rural economies, innovation is critical for economic resilience, helping businesses adapt to changing markets and create higher-value products and services. The researchers said it also can help create local jobs, boosting the economy and reducing the need for people to move away.

"The data show that 5% to 6% 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, Han said, the specific challenges faced by innovative rural businesses remain understudied in the U.S.

For the study, the researchers analyzed detailed federal data on 161,500 firms from the 2021 Annual Business Survey, administered jointly by the Census Bureau and the National Center for Science and Engineering Statistics within the U.S. National Science Foundation.

Data included information on whether firms applied for credit between the years of 2018 and 2020. Firms were considered innovative if they introduced new or improved goods or services or if they incorporated advanced technologies such as artificial intelligence or robotics into their processes.

The research team found that 16.8% of rural firms and 14.6% of urban firms applied for credit during the study period. Across the different types of innovation, service innovation faced the strongest constraints—these firms had 90% higher application odds but 39% lower reception odds.

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.