Bank Competition and Firm Innovation Output: The Role of Financing Constraints

The economic theory tries to explain the coexistence of China’s technological progress and imperfect bank-oriented system. We use data which includes bank branches and manufacturing enterprises information across China over the period 1998-2011 to check how bank competition impacts firm innovation output and the role of firms’ financing constraints in bank competition impacting firm innovation output. We find that increased competition among banks can improve the innovation output of enterprises and the positive effect is stronger for firms with more dependence on external financing, high financing cost, and short operating years. The increase in banks branches and decline in assets share of state-owned banks are helpful to promote firm innovation. Moreover, bank competition enables small firms and opacity firms to improve their innovation output in regions with few state-owned banks branches. Promoting bank competition by privatizing state-owned banks or downsizing giant banks would be a way to promote enterprise R&D investment and improve enterprise productivity. This study sheds light on the determinants of innovation in transitional economies