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| Are Small Banks Conducive to Innovation? |
| Chen Rong1, Zhang Jie2 |
1.School of Economics, Renmin University of China, Beijing 100872, China
2.Institute of China’s Economic Reform & Development, Renmin University of China, Beijing 100872, China |
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Abstract The modern financial system embodies fundamental institutional arrangements to promote sustainable improvement of enterprises’ self-innovation capacities. Whether the current bank-directed financial system can effectively generate continuous improvement of enterprises’ technological innovation capabilities is a research question of significant theoretical and policy value in the Chinese context. On the one hand, China is fully entering a stage of high-quality innovation-driven development. “To uphold the central role of innovation in its modernization drive and take self-reliance in science and technology as the strategic underpinning for national development” has become a core goal of China’s economic restructuring and national sustainable development strategy. The basis of these strategies is to fully implement the sustainable improvement of enterprises’ technological innovation capabilities. On the other hand, to advance the structural reform of the financial supply side and build up a modern financial system that can help achieve high-quality development of the real economy, especially to accelerate the construction of a modern financial system that can effectively support the sustainable improvement of enterprises’ technological innovation capabilities, is also one of the most urgent institutional reform tasks in China. In fact, China’s financial system reform has been adhering to the overall reform idea of building a banking institution system with a reasonable division of labor among large, medium and small enterprises, among which the development of small and medium-sized banking institutions has been identified as one of the key objects of China’s financial system reform. However, whether China’s existing small banking system can effectively support the innovation and R&D activities of micro-enterprises is a major unproven problem, which is not only a key issue related to the reform of China’s financial system, but also a core component of building up a financial development theory with Chinese characteristics. Therefore, from the perspective of the heterogeneity of the banking system in developing countries, this article aims at re-examining the possible impact of the indirect financial system directed by banking institutions on micro-enterprise innovation.Based on an analysis of the unique large sample of enterprise data in China, findings of this empirical study indicate. (1) It certifies the theoretical hypothesis that “smaller banks are conducive to enterprise innovation”, that is, urban and rural commercial banks in China have a significant promoting effect on enterprise innovation activities. (2) It also verifies the theoretical hypothesis that “bank competition plays a stronger role in pushing smaller banks to effectively support enterprise innovation”. The increase in the level of bank competition caused by the flexible control policy for small and medium-sized banks to set up branches in different places in China is the key mechanism that brings about the promotion effect of urban and rural commercial banks on enterprise innovation activities. However, such promotion effect may mainly come from the adjustment of the loan term structure of banking institutions under the pressure of competition. The enhancement and intensification of bank competition urges urban and rural commercial banks in China to adopt medium and long term loans, so as to better meet the external financing needs generated by micro-enterprise innovation activities. These empirical evidences enrich the multilevel objective understanding of the internal mechanism of positive incentive effect of bank-led financial system on innovation.
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Received: 10 December 2021
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2023, Vol. 53 
