Does access to credit availability encourage corporate innovation: evidence from the geographic network of banks in China

CAI Qingfeng CHEN Yihui LIN Kun

【Abstract】How does credit availability from banks affect firms’ innovative activities? The answer to this question is crucial to unraveling how financial development can effectively promote a country’s economic growth. The empirical evidence suggests that financial development has a positive effect on firm innovation (Benfratello et al., 2008; Cai and Dong, 2016). However, financial development has been measured in terms of the overall amount of credit (Guiso et al., 2004; Ji, 2013) or the amount of credit at the regional level (Xie and Fang, 2011; Tang and Wu, 2015). Few studies have focused on the geographic network of bank branches, which gives us rich variations at the firm level. Based on the premise that distance erodes banks’ ability to acquire borrower-specific information, Hauswald and Marquez (2006) formally analyzed lending relationships under locationally differentiated information. They proposed that banks derive cost advantages from being geographically closer to the borrowing firms, as it is easier for banks to maintain loan relationships with firms that are closer to them. This means that the geographical network of bank branches that determines the availability of firms’ credit resources also affects innovation activities and the growth of the economy. China’s financial system is characterized by a typical bank-dominant system. At the end of 2018, China’s banking assets (CNY 268 trillion) accounted for nearly 90% of China’s total financial assets (CNY 300 trillion). Outside of financial centers such as Beijing, Shanghai, and Shenzhen, China’s financial geographic structure is largely determined by the layout of bank branches. Therefore, the financial resources that a firm can obtain mainly depend on the number of bank branches nearby. In addition, China and other countries such as the United States, European countries, and Japan have adopted easy monetary policies to stimulate economic growth since the 2008 financial crisis. However, the easy monetary policy, in the form of large amounts of bank credit, has not prompted firms to accelerate innovation or increase R&D investment. Instead, a large number of firms have leveraged production capacity using “cheap” bank credit resources. In February 2019, China began a financial reform designed to better serve the real economy’s structural transformation and upgrading under the guidance of a government proposal to “deepen the structural reform of the financial supply and better serve the real economy.” Against this background, this paper studied how the availability of credit, measured in the geographical organization of the bank system, affected firms’ innovation activities in the real economy. Using the number of bank branches around the listed company as a proxy variable for access to bank credit, we investigated the link between access to bank credit resources and firm innovation using a panel fixed-effect model. Our results showed that firms with more bank branches nearby have less R&D investment, particularly state-owned firms and large firms. The results are robust to the addition of more control variables and comparison to a placebo test. Further, the negative relationship between access to bank credit and firm innovation is mainly driven by large state-owned banks, whereas joint stock banks and local small and medium-sized banks have positive effects on firm innovation. In addition, we confirmed that proactive leverage is the mechanism through which access to bank credit affects firm innovation. Finally, firms with more credit availability tend to overinvest and divert more credit to investment in the real estate sector. Our findings explained why firms that have better credit availability reduce R&D investment. China’s financial reform has been steadily pushing forward, given its importance for economic development. This paper focuses on China’s geographic network of bank branches at the micro level, and is the first study to detect its negative effect on firm innovation, which is important for economic development. It also shows various mechanisms through which access to credit affects firm innovation, such as proactive leverage, overinvestment, and investment in the real estate industry. Whereas previous studies measure the availability of financial resources overall or at the regional level, the micro level measure, in terms of bank-firm distance and financial geographic structure, allows us to better investigate the mechanisms. We thus contributed to the literature on finance and firm innovation. In addition, our results have implications for financial reforms in developing countries worldwide that are characterized by bank-led financial systems.

【Keywords】 access to credit availability; innovation; geographic network of banks; proactive leverage; overinvestment;

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ISSN:0577-9154

CN:11-1081/F

Vol 55, No. 10, Pages 124-140

October 2020

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