Bank Competition, Innovation Resource Allocation, and Firm Innovation Output: Empirical Evidence from the China Industry Census Database
DAI Jing, YANG Zheng, LIU Guanchun, XU Chuanhua
School of Finance, Hubei University of Economics; School of Management, Wuhan Textile University; School of Public Economics & Administration, Shanghai University of Finance and Economics; School of Finance, Hubei University of Economics
Summary:
There is emerging evidence that debt finance is an important source of capital for firms engaged in innovation. In recent years, with the deregulation of bank entry, China's banking system has witnessed rapid changes in market competition. This paper provides a detailed analysis and establishes causal links between bank competition and innovation in the Chinese context. Our first analysis concerns how bank competition has changed in China. We capture commercial city bank branch data and construct the Herfindahl-Hirschman Index (HHI) to measure competition levels. We find that the banking market structure has witnessed rapid changes with large variations across cities and time. This provides a good opportunity to test the interaction of firm innovation and changes in bank competition. We then match patent information from the State Intellectual Property Office (SIPO) to firm-level data from the China Industry Census (CIC). This allows us to trace the level of bank competition firms face and how firms respond in terms of new patent applications. We expect firm innovation to increase following increased bank competition because firms can take advantage of the greater supply of finance. Second, we examine two possible channels to explain this result. We test whether entry to innovation and the innovation input of incumbent firms responds to increased bank competition. We expect that bank competition relaxes entry barriers for new firms and spurs greater innovation among incumbents. Moreover, we look at the differences in these two possible channels across different types of firms. We expect small and medium-sized non-state owned firms to take advantage of the improved credit conditions to finance innovative projects. Third, to clarify whether bank competition affects the allocation of firm innovation investment, we test the relationship between bank competition and the distribution of firm innovation output and input. We expect that the distribution of innovation input and output will tighten. Our paper advances two strands of the literature. First, it extends the literature on the real effects of financial structure on innovation in China by focusing on the impact of bank competition on firm innovation. Second, our paper contributes to the emerging literature on innovation by showing that bank competition allows firms entry to bank credit and encourages incumbent firms to invest more in innovation. We utilize and compile three datasets for our empirical analysis, including all Chinese bank branch information, CIC firm-level data on R&D expenditure and other firm-level control variables, and SIPO patent data for firms. This paper has three main findings. First, we find that the overall positive effects of bank competition on innovation output are strong and robust. Second, we explore the possible underlying mechanisms and show that bank competition expands access to credit for firms, which allow entrant firms to begin innovative projects and incumbent firms to invest more in innovation. Third, we find these mechanisms more prominent for non-state-owned enterprises and for small and medium enterprises. These results indicate that the growth in overall innovation output is partly due to the allocation in the supply of credit to small and medium-sized and non-state-owned enterprises. All of these results suggest that a reduction in the regulation of bank entry is can promote firm innovation in China. Bank competition improves the distribution of innovation resources among firms, thus more firms are able to secure bank financing for innovative projects. Our paper adds to the literature on financial development and economic growth in the following ways. First, we find that bank competition expands access to credit for potential firms, which relaxes their financial constraints, allowing firms entry and access to innovative projects and incumbent firms to invest more in innovation. Second, we extend the literature by examining the heterogeneous effects of bank competition on different types of firms, and find that the growth in overall innovation output is mainly due to the output of small and medium-sized non-state owned firms. Third, this paper provides a microeconomic foundation for the literature on the finance-innovation nexus in China. In future research, it will be important to understand how this rapid change in the banking sector affects technological progress in China, such as in the relationship between the banking system and disruptive innovation. This will be of great value in understanding the transformation of China's economic structure.
戴静, 杨筝, 刘贯春, 许传华. 银行业竞争、创新资源配置和企业创新产出——基于中国工业企业的经验证据[J]. 金融研究, 2020, 476(2): 51-70.
DAI Jing, YANG Zheng, LIU Guanchun, XU Chuanhua. Bank Competition, Innovation Resource Allocation, and Firm Innovation Output: Empirical Evidence from the China Industry Census Database. Journal of Financial Research, 2020, 476(2): 51-70.
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