Banking structure change and corporate innovation: evidence from Chinese city‐branch data

This paper documents empirical support for a key micro‐level channel – banking structure change induced by entry of small banks – through which financial sector deregulation affects corporate innovation. Using China’s banking deregulation on city commercial banks in 2006, we find robust evidence that banking structural change induced by the entry of small banks stimulates local industrial patent output. Furthermore, we find that the stimulating effects of small bank entry on local industrial patent output are more pronounced when the local banking system is previously dominated by large state‐owned banks and when the small banks have entered a city with more small and medium‐sized enterprises (SMEs). Our study suggests that banking structure change induced by small banks crucially affects the real economy.