Firm innovation and local bank efficiency in Italy: Does the type of bank matter?

In this study, we use a conventional Probit model to investigate the effects of banks’ cost efficiency on innovation in Italy. In particular, we assess whether the efficiency–innovation relation depends on the type of banking institutions, as we partition them according to whether they are cooperatives or non‐cooperatives. When we examine the two types of financial intermediaries simultaneously, the higher efficiency among cooperative banks has a positive and significant effect on R&D collaborations with firms and consultants and process innovation, while higher efficiency among non‐cooperative banks has a positive and significant effect on product innovation. When we consider each individually, the effect holds for cooperatives, but the opposite holds for non‐cooperatives, as the positive and significant effect on product innovation vanishes. To deal with the likely endogeneity of bank efficiency, we also propose the application of an Instrumental Variable Probit (IV Probit) model. When we again jointly examine cooperative and non‐cooperative banks, our evidence indicates that higher efficiency among non‐cooperative banks enhances in‐house R&D and both product and process innovations, while we find a non‐significant effect for cooperative banks. However, when we individually examine the efficiency of each intermediary, we find evidence of a positive and significant effect on the process innovation for cooperative banks and of a positive relation between non‐cooperative banks’ efficiency, in‐house R&D and product and process innovations.