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| Innovative Effects of Financial Competition in Counties: An Examination of Policy Regulation Impacts |
| ZHAO Yaxiong, WANG Yipeng, WANG Xiuhua
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| College of Finance and Statistics, Hunan University |
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Abstract The county's economy serves as a bridge between urban and rural economic development. Innovation is crucial in accelerating the transformation and enhancement of the county's economy, injecting it with significant vitality for high-quality growth. However, compared to urban innovation ecosystems, financial support for innovation at the county level faces two significant challenges: insufficient funding and a lack of quality collateral. These hurdles often result in financial institutions' reluctance to provide support or lead to a proliferation of homogeneous financial products, creating obstacles to the high-quality advancement of county economies. These issues require urgent attention and resolution.
This paper addresses whether the competitive dynamics within county-level financial markets can positively affect county innovation. Furthermore, it investigates whether ongoing financial reforms and the implementation of relevant collateral policies moderate financial support for county-level innovation. To explore these inquiries, this paper empirically assesses the innovative effects of financial competition within county contexts, utilizing banking outlets at the county and sub-country level as the focal point. It further examines the moderating roles of government policy implementation on financial support for county innovation from both supply-side and demand-side perspectives, alongside the economic implications of county financial support for innovation. The findings of this research provide a robust foundation for decision-making regarding structural reforms in county-level financial supply and the enhancement of financial backing for innovation through policy interventions.
We find that an enhancement in the degree of financial competition within county areas significantly stimulates the output of innovative activities. This effect is primarily attributable to improved financial efficiency and the mitigation of capital outflows resulting from heightened financial competition, effectively transforming financial institutions from “extractive entities” to “supportive agents.” Nonetheless, compared to the “quantity” of county-level innovative activities, the impact of increased financial competition on the “quality” of these innovations remains relatively insufficient. Further analysis reveals that, apart from the insignificant moderating effect of digital financial development, advancements in county financial reforms—such as the establishment of rural banks and the restructuring of rural commercial banks—alongside pilot policies for mortgage loans based on contracted rural land operating rights and patent financing, significantly enhance the innovative output effects of county financial competition. The resultant innovation activities promote self-employment and income growth within county regions.
This paper contributes to the existing literature from the following three dimensions: First, diverging from existing research at macro or enterprise levels, this paper investigates the innovative effects of financial competition from the perspective of relatively underdeveloped counties. Previous studies have largely focused on provincial or municipal levels, analyzing the economic growth and income effects of financial competition or examining the influence of bank competition on innovation among listed enterprises, with insufficient attention devoted to underdeveloped counties. This county-level analysis enriches the current literature concerning the interplay between county finance and innovation. Second, rather than relying solely on traditional channels such as resource allocation and financing constraints to elucidate how finance supports innovation, this paper validates the mechanism of county financial efficiency while considering the unique characteristics of county financial markets. It explores differentiated capital flow channels to elucidate the pathways through which financial competition influences county innovation, providing a novel perspective on the ongoing trend of financial institutions engaging with county innovation development. Third, acknowledging the government's active role in county economies and financial markets, this paper investigates the moderating effects of government policy implementation on the innovative outcomes of county financial competition and its underlying transmission mechanisms. This inquiry supplements the existing body of research on the relationship between government and financial markets, particularly regarding rural financial contexts.
In light of these empirical findings, this paper proposes several strategic approaches to enhance the positive role of county finance in supporting innovative activities. First, it recommends strengthening the innovative effects of competition among county financial institutions. This involves cultivating a complementary and healthy competitive environment, improving operational efficiency of financial institutions, reducing capital outflow, and ensuring robust financial support for innovative activities. Second, the paper advocates for gradually establishing a long-term mechanism to support county innovation activities financially. This should include the comprehensive implementation of pilot programs for mortgage loans based on contracted rural land operating rights and the expansion of patent financing initiatives to encourage financial institutions' involvement in supporting county innovation. Third, it emphasizes the importance of leveraging the economic effects of county financial competition to drive innovation and sustain income growth among rural residents. To address potential imbalances and inadequacies resulting from county innovation, promoting financial competition and innovative activities and enhancing the financial landscape in underdeveloped regions within counties is crucial. This would involve guiding financial resources toward these areas and increasing support for innovative endeavors among rural residents.
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Received: 09 August 2023
Published: 01 November 2024
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