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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
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    References listed on IDEAS

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    1. Ni, Yunsong & Sun, Jiaqi, 2025. "Digital transformation and the development of servitized manufacturing in China: An asset specificity perspective," Finance Research Letters, Elsevier, vol. 85(PB).

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