IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v17y2025i1p244-d1558158.html

How Does Financial Support Affect Firms’ Innovation and Total Factor Productivity: A Quasi-Natural Experiment in China

Author

Listed:
  • Guangyuan Lu

    (School of Business, University of Aberdeen, Aberdeen AB24 3FX, UK)

  • Xiong Bai

    (Zhou Enlai School of Government Management, Nankai University, Tianjin 300071, China)

  • Xiaoyun Zhang

    (School of Business, Yangzhou University, Yangzhou 225127, China)

Abstract

Innovation and productivity improvements are essential drivers of economic growth, social stability, and sustainable development. As a high-risk, long-term activity, innovation requires external support, especially from the financial sector. In response, governments have introduced various financial support policies, yet their effectiveness remains debatable. Using panel data from Chinese listed firms between 2006 and 2022, we examined the impact of an innovation-oriented financial support initiative in China—the Technology and Finance Integration (TFI) pilot—on firm innovation and total factor productivity (TFP). This quasi-natural experiment effectively alleviated endogeneity and helped us establish the causality. Our results show that TFI significantly enhances both the quantity and quality of firms’ innovation, as well as TFP. Furthermore, we found that the policy effects are more pronounced in firms with higher perceived uncertainty, in private firms, and in those located in regions with advanced financial development. Improved liquidity conditions, increased R&D investment, and better asset allocation constitute plausible mechanisms for interpreting our results. Theoretically, this paper complements the research on the nexus between financial support and innovation activity, shedding light on the underlying mechanisms. Practically, our findings provide valuable insights for the formulation of financial policies to promote innovation, particularly in developing countries that lack sufficient R&D incentives and effective market mechanisms to drive technical upgrading and productivity growth.

Suggested Citation

  • Guangyuan Lu & Xiong Bai & Xiaoyun Zhang, 2025. "How Does Financial Support Affect Firms’ Innovation and Total Factor Productivity: A Quasi-Natural Experiment in China," Sustainability, MDPI, vol. 17(1), pages 1-33, January.
    • Handle: RePEc:gam:jsusta:v:17:y:2025:i:1:p:244-:d:1558158
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/17/1/244/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/17/1/244/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Liang, Yousha & Shi, Kang & Tao, Hanyi & Xu, Juanyi, 2024. "Learning by exporting: Evidence from patent citations in China," Journal of International Economics, Elsevier, vol. 150(C).
    2. Holmstrom, Bengt, 1989. "Agency costs and innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 12(3), pages 305-327, December.
    3. Liu, Biao & Li, Yanfeng & Liu, Jipeng & Hou, Yufei, 2024. "Does urban innovation policy accelerate the digital transformation of enterprises? Evidence based on the innovative City pilot policy," China Economic Review, Elsevier, vol. 85(C).
    4. Qiu, Larry D. & Wei, Xu & Zhou, Mohan & Zhou, Yi, 2024. "Resource, competition, and the equilibrium effects of innovation subsidies," Journal of Economic Behavior & Organization, Elsevier, vol. 224(C), pages 297-322.
    5. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    6. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
    7. Nickell, Stephen & Nicolitsas, Daphne, 1999. "How does financial pressure affect firms?," European Economic Review, Elsevier, vol. 43(8), pages 1435-1456, August.
    8. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    9. Maria Guadalupe & Olga Kuzmina & Catherine Thomas, 2012. "Innovation and Foreign Ownership," American Economic Review, American Economic Association, vol. 102(7), pages 3594-3627, December.
    10. Daniel A. Ackerberg & Kevin Caves & Garth Frazer, 2015. "Identification Properties of Recent Production Function Estimators," Econometrica, Econometric Society, vol. 83, pages 2411-2451, November.
    11. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    12. Long, Cheryl Xiaoning & Yi, Wei, 2024. "Information effects of high-speed rail: Evidence from patent citations in China," China Economic Review, Elsevier, vol. 84(C).
    13. Wei, Ruiqi & Wang, Xinchun & Chang, Yu, 2021. "The effects of platform governance mechanisms on customer participation in supplier new product development," Journal of Business Research, Elsevier, vol. 137(C), pages 475-487.
    14. Lan Thanh Archer & Parmendra Sharma & Jen-Je Su, 2020. "Do credit constraints always impede innovation? Empirical evidence from Vietnamese SMEs," Applied Economics, Taylor & Francis Journals, vol. 52(44), pages 4864-4880, September.
    15. Sun, Liyang & Abraham, Sarah, 2021. "Estimating dynamic treatment effects in event studies with heterogeneous treatment effects," Journal of Econometrics, Elsevier, vol. 225(2), pages 175-199.
    16. Wen, Jun & Zhao, Xinxin & Fu, Qiang & Chang, Chun-Ping, 2023. "The impact of financial risk on green innovation: Global evidence," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    17. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    18. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    19. Toni M. Whited & Guojun Wu, 2006. "Financial Constraints Risk," The Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 531-559.
    20. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 317-341.
    21. Hanna Hottenrott & Bettina Peters, 2012. "Innovative Capability and Financing Constraints for Innovation: More Money, More Innovation?," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 1126-1142, November.
    22. Andersen, Dana C., 2017. "Do credit constraints favor dirty production? Theory and plant-level evidence," Journal of Environmental Economics and Management, Elsevier, vol. 84(C), pages 189-208.
    23. Xue, Jianpo & Yip, Chong K. & Zheng, Junwei, 2021. "Innovation capability, credit constraint and the cyclicality of R&D investment," Economics Letters, Elsevier, vol. 199(C).
    24. Thorsten Beck & Ross Levine & Alexey Levkov, 2010. "Big Bad Banks? The Winners and Losers from Bank Deregulation in the United States," Journal of Finance, American Finance Association, vol. 65(5), pages 1637-1667, October.
    25. Roth, Jonathan & Sant’Anna, Pedro H.C. & Bilinski, Alyssa & Poe, John, 2023. "What’s trending in difference-in-differences? A synthesis of the recent econometrics literature," Journal of Econometrics, Elsevier, vol. 235(2), pages 2218-2244.
    26. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-1297, November.
    27. Nola Hewitt-Dundas, 2006. "Resource and Capability Constraints to Innovation in Small and Large Plants," Small Business Economics, Springer, vol. 26(3), pages 257-277, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jin, Man & Zhao, Shunan & Kumbhakar, Subal C., 2019. "Financial constraints and firm productivity: Evidence from Chinese manufacturing," European Journal of Operational Research, Elsevier, vol. 275(3), pages 1139-1156.
    2. Bennett, Benjamin & Stulz, René & Wang, Zexi, 2020. "Does the stock market make firms more productive?," Journal of Financial Economics, Elsevier, vol. 136(2), pages 281-306.
    3. Konings, Jozef & Magerman, Glenn & Van Esbroeck, Dieter, 2023. "The impact of firm-level Covid rescue policies on productivity growth and reallocation," European Economic Review, Elsevier, vol. 157(C).
    4. Yuan, Li & Rao, Siqi & Yang, Shenggang & Dai, Pengyi, 2023. "Does equity market openness increase productivity? the dual effects of Shanghai-Hong Kong stock Connect program in China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 88(C).
    5. Dariusz Kotlewski, 2022. "Przesłanki za wykorzystaniem rachunkowości wzrostu gospodarczego w badaniu specjalizacji regionalnych," Ekonomista, Polskie Towarzystwo Ekonomiczne, issue 2, pages 235-258.
    6. Jean-Charles Bricongne & Samuel Delpeuch & Margarita Lopez Forero, 2021. "Productivity Slowdown, Tax Havens and MNEs’ Intangibles: where is measured value creation?," Documents de recherche 21-01, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    7. Jean-Charles Bricongne & Samuel Delpeuch & Margarita Lopez Forero, 2021. "Regional Productivity Slowdown, Tax Havens and MNEs Intangibles: where is Measured Value Creation?," Working papers 835, Banque de France.
    8. Jože Damijan & Jozef Konings & Črt Kostevc & Katja Zajc Kejžar, 2022. "Explaining the Low Level of Investment in Slovenia," European Economy - Discussion Papers 169, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    9. Giorgio Brunello & Áron Gereben & Désirée Rückert & Christoph Weiss & Patricia Wruuck, 2022. "Do investments in human and physical capital respond differently to financing constraints?," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 158(1), pages 1-14, December.
    10. David Baqaee & Emmanuel Farhi, 2020. "Entry vs. Rents: Aggregation with Economies of Scale," NBER Working Papers 27140, National Bureau of Economic Research, Inc.
    11. Görg, Holger & Mulyukova, Alina, 2024. "Place-based policies and firm performance: Evidence from Special Economic Zones in India," European Economic Review, Elsevier, vol. 165(C).
    12. Laurens Cherchye & Bram De Rock & Annalisa Ferrando & Klaas Mulier & Marijn Verschelde, 2020. "Identifying Financial Constraints," Working Papers ECARES 2020-04, ULB -- Universite Libre de Bruxelles.
    13. Kiyoyasu TANAKA, 2025. "Synergy or Anergy? Foreign acquisition and firm productivity in Japan," Discussion papers 25085, Research Institute of Economy, Trade and Industry (RIETI).
    14. Guangjun Shen & Jingxian Zou, 2023. "Total Factor Productivity in China's Manufacturing Sector in the Aftermath of the Global Financial Crisis," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 31(2), pages 1-25, March.
    15. Laurens Cherchye & Bram De Rock & Annalisa Ferrando & Klaas Mulier & Marijn Verschelde, 2018. "Identifying Financial Constraints from Production Data," Working Papers ECARES 2018-31, ULB -- Universite Libre de Bruxelles.
    16. Li, Tongxia & Ang, Tze Chuan ‘Chewie’ & Lu, Chun, 2023. "Employment protection and the provision of trade credit," Journal of Banking & Finance, Elsevier, vol. 155(C).
    17. Li, Daiyue & Jin, Yanhong & Cheng, Mingwang, 2024. "Unleashing the power of industrial robotics on firm productivity: Evidence from China," Journal of Economic Behavior & Organization, Elsevier, vol. 224(C), pages 500-520.
    18. Zhou, Yuwen & Shi, Xin, 2025. "How does digital technology adoption affect corporate employment? Evidence from China," Economic Modelling, Elsevier, vol. 147(C).
    19. Chen, Minjia & Guariglia, Alessandra, 2013. "Internal financial constraints and firm productivity in China: Do liquidity and export behavior make a difference?," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 1123-1140.
    20. Ioannis Bournakis & Sotiris Papaioannou & Marina Papanastassiou, 2022. "Multinationals and domestic total factor productivity: Competition effects, knowledge spillovers and foreign ownership," The World Economy, Wiley Blackwell, vol. 45(12), pages 3715-3750, December.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jsusta:v:17:y:2025:i:1:p:244-:d:1558158. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.