Bank Ownership and Firm Innovation

This paper studies the effect of bank ownership on product innovation by borrowing firms,highlighting the role of the state, foreign, and combined foreign-state bank ownership. It uses Enterprise Survey datafor more than 22,000 firms in 49 countries from 2016 to 2020, linked to Fitchconnect data on banks: their ownership,soundness indicators, and legal origins. The paper confirms that a firm's access to bank credit is associated witha greater probability of product innovation, even when adjusting for possible reverse causality. If the credit isprovided by a state-owned bank, the probability that the borrowing firm will innovate increases. The analysis doesnot find a similarly positive effect for foreign bank ownership. But when considering the combined effect offoreign state ownership, the results are most statistically and economically significant. Although the results may notbe extendable to research and development spending (a key input to innovation), the findings show that foreign statebanks can serve as an additional financing vehicle to stimulate radical innovation alongside equity financiers.