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Liu, Peisen; Li, Houjian
A icle
Does bank compe i ion spu i m inno a ion?
Jou nal o Applied Economics
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Does bank compe i ion spu fi m inno a ion?
Peisen Liu & Houjian Li
To ci e his a icle: Peisen Liu & Houjian Li (2020) Does bank compe i ion
spu fi m inno a ion?, Jou nal o Applied Economics, 23:1, 519-538, DOI:
10.1080/15140326.2020.1806001
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ARTICLE
Does bank compe i ion spu i m inno a ion?
Peisen Liu
a,b
and Houjian Li
c
a
College o Economics and Managemen , Sou hwes Uni e si y, Chongqing, China;
b
Resea ch Ins i u e o
In elligen Finance and Pla o m Economics, Sou hwes Uni e si y, Chongqing, China;
c
College o
Economics, Sichuan Ag icul u al Uni e si y, Chengdu, China
ABSTRACT
Fo ansi ion economies, he i ues o inancial de elopmen o
economic g ow h a e ob ious; howe e , bank compe i ion has
dubious e ec s due o a ious i m cha ac e is ics. This s udy uses
Chinese banking and i m da a om 1998 o 2011 o examine how
bank compe i ion a ec s i m inno a ion and how i m size and
owne ship in luence he e ec s o bank compe i ion. The esul s
show ha bank compe i ion p omo es i m-le el inno a ion and
ha his posi i e e ec is s onge o small i ms and non-s a e-
owned en e p ises (non-SOEs). In addi ion, bank compe i ion has
a mo e bene icial in luence on inno a ion o anspa en i ms and
domes ic i ms. These conclusions hus shed ligh on he eal e ec s
o bank compe i ion and he de e minan s o i m inno a ion in
de eloping coun ies.
ARTICLE HISTORY
Recei ed 3 Decembe 2019
Accep ed 2 Augus 2020
KEYWORDS
Bank compe i ion; s a e-
owned comme cial bank;
i m inno a ion; SOE
1. In oduc ion
Explo ing he de e minan s o i m inno a ion is i al, as i plays an impo an ole in
inc easing p oduc compe i i eness and p omo ing economic g ow h. Some s udies
analyze he e ec s o a ious ma ke cha ac e is ics on i m inno a ion, such as he
le el o ma ke compe i ion (Aghion, Bloom, Blundell, G i i h, & Howi , 2005), s ock
ma ke accessibili y (B own, Ma insson, & Pe e sen, 2013), he a ailabili y o en u e
capi al (Hsu, Tian, & Xu, 2014), housing p ice (Rong, Wang, & Gong, 2016), and college
expansion (Rong & Wu, 2020). O he s udies conside i m cha ac e is ics, such as
co po a e go e nance (Meulb oek, Li chell, Mulhe in, Ne e , & Poulsen, 1990), ins i u-
ional owne ship (Aghion, Van Reenen, & Zingales, 2013), s ock liquidi y (Huang, Fang,
& Mille , 2014), conglome a ion (Se u, 2014), and inancing cons ain s (Caggese, 2019).
China’s economy has g own apidly o 40 yea s, which challenges mains eam aca-
demic iews. Acco ding o ins i u ional economics heo y, China’s economic success
should no occu , because i has an impe ec legal sys em, inadequa e in es o p o ec ion,
and excessi e go e nmen in e en ion. The banking sec o plays a dominan ole as he
main sou ce o inancing o i ms in China’s inancial sys em; howe e , he banking
ma ke is domina ed by he Big Fou s a e-owned comme cial banks. The ma ke sha e
o he Big Fou s a e-owned comme cial banks d opped om 63% o 36% (by o al asse s)
CONTACT Houjian Li [email p o ec ed] College o Economics, Sichuan Ag icul u al Uni e si y,
Chengdu, China
JOURNAL OF APPLIED ECONOMICS
2020, VOL. 23, NO. 1, 519–538
h ps://doi.o g/10.1080/15140326.2020.1806001
© 2020 The Au ho (s). Published by In o ma UK Limi ed, ading as Taylo & F ancis G oup.
This is an Open Access a icle dis ibu ed unde he e ms o he C ea i e Commons A ibu ion License (h p://c ea i ecommons.o g/
licenses/by/4.0/), which pe mi s un es ic ed use, dis ibu ion, and ep oduc ion in any medium, p o ided he o iginal wo k is p ope ly
ci ed.
be ween 1995 and 2019, bu his dec ease in bank concen a ion has no e ec i ely
alle ia ed he inancing cons ain s o non-SOEs and small i ms (Lin, Sun, & Wu,
2015).
1
E en hough China’s banking sys em has unde gone ema kable e o ms in he
pas 20 yea s and small and medium-sized comme cial banks ha e de eloped apidly, he
Chinese go e nmen acknowledges ha small i ms ace mo e obs acles in ob aining bank
loans han la ge i ms. Banking ins i u ions canno mee small i ms’ capi al demands a
China’s cu en de elopmen s age, al hough such i ms ha e compa a i e ad an ages.
Thus, e i ying he ole o bank compe i ion in i m inno a ion is impo an o p omo e
inno a ion and imp o e capi al alloca ion e iciency o small i ms and non-SOEs.
The e a e wo iews on he compe i ion e ec s caused by he monopoly o s a e-
owned banks ha explain he puzzling ela ionship be ween bank compe i ion and i m
inancing accessibili y. The i s iew is he size compe i ion iew, which highligh s he
inapp op ia eness o he banking monopoly by la ge banks. This iew a gues ha
compe i ion among di e en size banks causes la ge i ms ob aining a la ge sha e o
loans han small i ms. The second iew is he owne ship compe i ion iew, which holds
ha banks, especially s a e-owned banks, a e mo e willing o p o ide unds o SOEs han
o non-SOEs due o go e nmen gua an ee and in e en ion. Acco ding o bo h he size
compe i ion and owne ship compe i ion iews, he monopoly o s a e-owned banks leads
o ine iciency in he inancial sys em. Fu he mo e, as s a e-owned banks a e bo h he
la ges banks and s a e-owned banks, measu ing hese banks cap u es he e ec s o size
compe i ion and owne ship compe i ion. The e o e, he size compe i ion and owne ship
compe i ion e ec s a e no iceably in e wined in he li e a u e, and he deba e conce n-
ing he ela ionship be ween bank compe i ion and i m inno a ion emains
inconclusi e.
The pu pose o his s udy is o in es iga e how bank compe i ion a ec s i m inno a-
ion and how bo h i m size and owne ship shape he in luence o bank compe i ion on
inno a ion. Speci ically, we use a Chinese panel da ase o 1998–2011 wi h 1,279,690
i m-yea obse a ions o ex end he unde s anding o he ela ionship be ween bank
compe i ion and i m inno a ion: (1) how bank compe i ion a ec s i m inno a ion, (2)
whe he small i ms a e mo e inno a i e han la ge i ms when bank compe i ion is mo e
in ense, and (3) whe he non-SOEs a e mo e inno a i e han SOEs when bank compe i-
ion is mo e in ense.
The empi ical esul s show ha i ms’ inno a ion ou pu inc eases ollowing bank
compe i ion and ha he o e all posi i e e ec o bank compe i ion is d i en by small
i ms, anspa en i ms, non-SOEs, and domes ic i ms. We add o his e idence no only
by inding ha bank compe i ion is posi i ely associa ed wi h i m inno a ion bu also by
highligh ing new channels behind hese esul s: he e ec s o bank compe i ion on i m
inno a ion di e depending on i m size, opaci y, and owne ship. These conclusions
ha e impo an implica ions o policy make s, sugges ing aluable policy issues ha
me i u he explo a ion, especially o e o ms in de eloping coun ies.
This s udy b oadens he eme ging esea ch on he ela ionship be ween banking
de elopmen and economic g ow h (Ijaz, Hassan, Ta azi, & F az, 2020; Rakshi &
Ba dhan, 2019). Fi s , p io s udies neglec he e ec s o i m size and owne ship when
1
The Big Fou s a e-owned comme cial banks a e he Indus ial and Comme cial Bank o China (ICBC), he Bank o China
(BOC), he Cons uc ion Bank o China (CBC), and he Ag icul u e Bank o China (ABC).
520 P. LIU AND H. LI
conside ing he e ec s o bank compe i ion on i ms’ inno a ion ac i i ies, whe eas his
s udy imp o es he unde s anding o bank compe i ion by es ima ing he applicabili y o
he size compe i ion and owne ship compe i ion e ec s. Second, p e ious s udies exam-
ine he e ec s o banking sec o compe i ion on inno a ion in de eloped economies
(Co naggia, Mao, Tian, & Wol e, 2015; Hsu e al., 2014), whe eas his s udy in es iga es
he e ec s o bank compe i ion in China, he bigges eme ging ma ke and ansi ion
economy. Thi d, his s udy p o ides a mic oeconomic ounda ion o he li e a u e on
he inance-g ow h nexus by examining he causal e ec s o bank compe i ion on i m
inno a ion.
The emainde o his s udy is o ganised as ollows. Sec ion 2 discusses how he s udy
ela es o he li e a u e and p oposes es able hypo heses. Sec ion 3 desc ibes he me h-
odology and da a. Sec ion 4 p esen s and discusses he es esul s. Sec ion 5 concludes
his s udy, s a es i s limi a ions, and p o ides sugges ions o u u e s udy.
2. Li e a u e e iew and hypo hesis
2.1. The e ec s o bank compe i ion on inno a ion
The e a e wo opposing iews ega ding he e ec s o bank compe i ion on i m inno a ion.
The in o ma ion hypo hesis a gues ha bank compe i ion is nega i ely associa ed wi h i ms’
access o c edi because compe i ion lowe s banks’ incen i es o in es in so in o ma ion
and ela ionship lending (Owen & Pe ei a, 2018). P oblems such as ad e se selec ion and
mo al haza d caused by in o ma ion asymme y lead o compe i ion in he banking indus y,
which wo sens inancing cons ain s (Ayalew & Xianzhi, 2019). Banks canno sc een po en-
ial bo owe s in compe i i e ma ke s and hen lend o low-quali y bo owe s (Ma quez,
2002), while banks wi h monopoly powe a e mo e mo i a ed o sc een in o ma ion due o
in o ma ion asymme y (S igli z & Weiss, 1981). Mo eo e , ma ke powe p omo es i ms’
access o c edi by p o iding inancial ins i u ions wi h an incen i e o build long- e m
ela ionships wi h bo owe s (Pe e sen & Rajan, 1995). Bank concen a ion p omo es inan-
cial inclusion, hus acili a ing access o c edi (Owen & Pe ei a, 2018).
In con as , he ma ke powe hypo hesis a gues ha inc eased bank compe i ion
alle ia es business inancial cons ain s because compe i ion dec eases banks’ ma ke
powe . Inc eased compe i ion in he inancial ma ke p omo es i m inancing and
inno a ion h ough educing c edi a ioning (Guzman, 2000), p omo ing i ms’ ope a-
ional e iciency (Ben a ello, Schian a elli, & Sembenelli, 2008), dec easing lending a e
(Ca bo-Val e de, Rod iguez-Fe nandez, & Udell, 2009), and alle ia ing he nega i e
e ec o co up ion (Ba h, Lin, Lin, & Song, 2009). Mo eo e , he elaxa ion o he
es ic ions on bank b anches leads o mo e bank b anches compe ing wi h each o he ,
which expands he a ailabili y o loans and p omo es inno a ion quan i y and quali y in
manu ac u ing en e p ises (Amo e, Schneide , & Žaldokas, 2013; Rice & S ahan, 2010).
In a highly compe i i e inancial ma ke , banks wi h low ma ke powe a e mo e willing
o educe c edi p ices han banks wi h high ma ke powe (Lian, 2018). In addi ion, bank
compe i ion’ e ec s on en e p ises’ access o ex e nal inancing may depend on he
deg ee o in o ma ion asymme y. Bank compe i ion inc eases he a ailabili y o i m
inancing when he e is no in o ma ion asymme y in he ma ke (Gonzalez & Gonzalez,
2014).
JOURNAL OF APPLIED ECONOMICS 521
Enhancing i ms’ access o bank c edi esul s in mo e in ensi e inno a ion ac i i ies,
whe eas poo access o ex e nal inancing is likely o hinde i m inno a ion. We expec
ha wi h inc eased bank compe i ion, inno a ion a he i m le el will inc ease because
i ms can use he imp o ed inancing condi ions and g ea e c edi supply o suppo
inno a ion p ojec s and inc ease inno a ion ou pu . The i s hypo hesis is s a ed as
ollows:
Hypo hesis 1: An inc ease in bank compe i ion has a posi i e e ec on i m inno a ion.
2.2. The e ec s o i m size on inno a ion
The sensi i i y o i m inno a ion o bank compe i ion may a y depending on i m size
because di e en size i ms ha e di e en inancing modes (Beck, Demi guc-Kun , &
Maksimo ic, 2008). Some s udies show ha he imp ope monopoly o s a e-owned
banks as he la ges banks esul s in an excessi e p opo ion o c edi alloca ed o la ge
i ms. These i ms ha e mo e inancing oppo uni ies and asse di e si ica ion, and hey
a e gene ally less isky han small i ms (Bo iso a, Fo ak, Holland, & Megginson, 2015;
Dimelis, Gio opoulos, & Lou i, 2019). As la ge i ms ha e be e access o he lending
ma ke , hey a e less dependen on inancing om banks and less in luenced by banks’
p e e ences han small i ms (Gonzalez, 2017). Mo eo e , banks’ p e e ences ha e mo e
in luence on small i ms, and hese i ms ace mo e c edi cons ain s han la ge i ms
(Adegboye & Iwe iebo , 2018; Ayalew & Xianzhi, 2019; Gonzalez, 2015). I is no easy o
small i ms o ob ain loans om la ge banks o o main ain ela ions wi h la ge inancial
ins i u ions, because he abili y o hese inancial ins i u ions o p ocess so in o ma ion
is less de eloped (Be ge & Udell, 2002).
These s udies show ha la ge i ms ha e a la ge pool o inancial ins i u ions om
which o ob ain ex e nal inancing han small i ms. Compa ed wi h small i ms, la ge
i ms can in es mo e esou ces in inno a i e ac i i ies and bene i om economies o
scale. Fo una ely, he de elopmen o ci y comme cial banks and join -s ock banks
alle ia es small i ms’ inancing cons ain s (Chong, Lu, & Ongena, 2013). The e o e,
we explo e whe he bank compe i ion’s e ec on i m inno a ion di e s based on i m
size. In iew o hese issues, he second hypo hesis is as ollows:
Hypo hesis 2: The e ec o bank compe i ion on i m inno a ion is s onge o small
i ms.
Acco ding o he in o ma ion hypo hesis, banks in es mo e in so in o ma ion as
bank compe i ion is lowe . Small i ms a e mo e in o ma ionally opaque han la ge i ms,
so he in o ma ion hypo hesis should play a signi ican ole o small i ms (Be ge &
Udell, 1995, 2002). Small banks ha e ad an ages in o ming ela ionships wi h opaque
i ms ha use mo e so in o ma ion (Be ge , F ame, & Mille , 2005). In addi ion, in
a homogeneous ma ke wi h many small banks, bank compe i ion inc eases he access o
opaque i ms o c edi , whe eas in a he e ogeneous ma ke con olled by la ge banks,
bank compe i ion educes access o ex e nal inancing by opaque i ms (Hedde go &
Lai enbe ge , 2017). Due o in o ma ion ad an age, he compe i ion o local banks
p omo es he inno a ion ac i i ies o opaque i ms mo e han ha o dis an banking
522 P. LIU AND H. LI
ma ke s (Tian & Han, 2019). On he o he hand, bank compe i ion is posi i ely ela ed o
inancing cos and opaque i ms ha e highe cos o c edi (Rahman, T a ona iciene,
Sm cka, & And oniceanu, 2019). The hi d hypo hesis is s a ed as ollows:
Hypo hesis 3: The e ec o bank compe i ion on i m inno a ion is s onge o opaque
i ms.
2.3. The e ec s o i m owne ship on inno a ion
The go e nmen has s ong in luence on en e p ises in de eloping coun ies, o exam-
ple, p o iding implici go e nmen gua an ees and loans h ough s a e-owned banks.
Mo eo e , bank manage s may make lending decisions based on poli ics, ideologies, o
pe sonal objec i es a he han bank p o i s. Banks end o p e e SOEs when building
poli ical connec ions wi h go e nmen s and poli icians by p o iding a ou able c edi
e ms o SOEs, which is help ul o banks o ob ain luc a i e con ac s (Bu le , Fau e , &
Mo al, 2009). The e o e, he le el o bank loan disc imina ion is s onge in less
inancially de eloped egions o whe e go e nmen in e en ion is s ong (Jiang & Li,
2006). Go e nmen in e en ions and s a e-owned comme cial banks esul in capi al
misalloca ion in China, as lending by hese banks is in a ou o SOEs, which a e less
e icien , and biased agains non-SOEs (Lin e al., 2015).
Since non-SOEs ha e less access o inancing, hese i ms a e mo e ely on ex e nal
inancing and hus a e mo e in luenced by bank compe i ion han SOEs. Inc eased bank
compe i ion may p o ide oppo uni ies o non-SOEs o access loans wi h lowe bo ow-
ing cos s. The e o e, he owne ship compe i ion iew a gues ha he p i a iza ion o
s a e-owned banks and he educ ion o go e nmen in e en ions p omo e bank com-
pe i ion and imp o e he alloca ion e iciency o inancial esou ces, as occu ed in he
Uni ed Kingdom. Conside ing hese issues, he ou h hypo hesis is as ollows:
Hypo hesis 4: The e ec o bank compe i ion on i m inno a ion is s onge o non-
SOEs han o SOEs.
3. Me hodology and da a
3.1. Empi ical me hodology
By es ima ing a ious o ms o models (1) o (4), we assess how bank compe i ion a ec s
i m inno a ion and how i m size and owne ship shape he e ec s o bank compe i ion
on inno a ion:
Ln Inno a ionj;i; ¼β0þβ1B anchCR4i; 1þβ2Fj;i; 1þωiþη þμkþεj;i; (1)
Ln Inno a ionj;i; ¼β0þβ1B anchHHIi; 1þβ2Fj;i; 1þωiþη þμkþεj;i; (2)
Ra io Inno a ionj;i; ¼β0þβ1B anchCR4i; 1þβ2Fj;i; 1þωiþη þμkþεj;i; (3)
Ra io Inno a ionj;i; ¼β0þβ1B anchHHIi; 1þβ2Fj;i; 1þωiþη þμkþεj;i; (4)
whe e j indexes i m, i indexes p e ec u e-le el egion in China, and indexes yea .
Ln_Inno a ion
j,i,
and Ra io_Inno a ion
j,i,
a e dependen a iables and deno e he
JOURNAL OF APPLIED ECONOMICS 523
inno a ion pe o mance o i m j in p e ec u e-le el egion i in yea .
2
This s udy uses
wo s uc u al measu es, he a io o he Big Fou s a e-owned comme cial banks
b anches o he o al numbe o bank b anches (i.e., B anchCR4) and he He indahl
index o he Big Fou s a e-owned comme cial banks b anches o he o al numbe o
bank b anches (i.e., B anchHHI), o measu e bank compe i ion, wi h lowe alues
indica ing mo e in ense compe i ion. I β
1
is nega i e and signi ican , inc eased bank
compe i ion exe s a posi i e e ec on i m inno a ion. I he pa ame e is posi i e and
signi ican , inc eased bank compe i ion hinde s i m inno a ion.
Fi ms’ access o unds om banks is in luenced by he ma ke s uc u e, business
condi ions, in o ma ion in as uc u e, and ins i u ional en i onmen (Be ge & Udell,
2002). The e o e, models (1) o (4) con ol o i m-le el and indus y-le el cha ac e -
is ics ha may in luence i m inno a ion. F
j,i,
is a se ies o con ol a iables ha includes
i m asse s, age, capi al-labou a io, le e age a io, e u n on asse s, go e nmen subsidy,
asse angibili y, and indus y concen a ion. ω
i
is egional ixed e ec s and is used o
ackle he p oblem o unobse able a iables omi ed om egional cha ac e is ics. Fo
example, as e economic g ow h in ce ain a eas may be unobse able and co ela ed
wi h bo h bank compe i ion and i m inno a ion. η
is yea ixed e ec s ha abso b ime
a ying cha ac e is ics, such as he o e all le el o economic g ow h, coun y-wide
policies, and e o ms. μ
k
is indus y ixed e ec s ha abso b he e ec s o indus ial
a ia ion. ε
j,i,
is he e o e m. S anda d e o s a e clus e ed a bo h he p e ec u e and
indus y le els in he es s.
3.2. Va iable measu emen
This s udy cons uc s wo measu es o i m inno a ion. The i s measu e is a i m’s o al
alue o new p oduc . The dis ibu ion o i ms’ new p oduc in he sample is igh -skewed,
and we hus use he loga i hm o a i m’s alue o new p oduc o measu e i m inno a ion
(Ln_Inno a ion). To a oid losing alid obse a ions when a i m’s new p oduc is ze o, we
add one o he new p oduc alues when calcula ing he loga i hm. The second measu e is
he a io o a i m’s new p oduc alue di ided by i s g oss indus ial ou pu alue
(Ra io_Inno a ion). In his s udy, new p oduc is a b and-new p oduc de eloped and
p oduced using new echnical p inciples and design concep s o a p oduc ha is signi i-
can ly imp o ed in s uc u e, ma e ial, p ocess, o o he aspec s o e he o iginal p oduc ,
hus signi ican ly imp o ing p oduc pe o mance o expanding i s unc ion.
Following p e ious s udies (Ca lson & Mi chene , 2009; Economides, Hubba d, &
Palia, 1996; Temes a y, 2015), his s udy uses wo s uc u al measu es, he concen a ion
a io (B anchCR4), and he He indahl index (B anchHHI) as p oxies o bank compe i-
ion. The adi ional s uc u e-conduc -pe o mance (SCP) model a gues ha low con-
cen a ion in he inancial ma ke is posi i ely ela ed o he deg ee o compe i ion and
2
China’s adminis a i e egions a e di ided in o ou le els: p o incial adminis a i e egions, p e ec u e-le el adminis-
a i e egions, coun y-le el adminis a i e egions, and ownship-le el adminis a i e egions. As o June 2018, China
has 34 p o incial-le el adminis a i e di isions, 334 p e ec u e-le el adminis a i e di isions, 2,851 coun y-le el
adminis a i e di isions, and 39,888 ownship-le el adminis a i e di isions. No e ha he le el o bank compe i ion
measu ed by his s udy is a he p e ec u e le el. In iew o he special adminis a i e le els o Beijing, Shanghai, Tianjin,
and Chongqing, each municipali y di ec ly unde he cen al go e nmen is ea ed as an independen sample in he
calcula ions.
524 P. LIU AND H. LI
esul s in lowe p o i abili y because inancial ins i u ions ha e o se highe deposi
in e es a es and lowe loan in e es a es.
In addi ion, models (1) o (4) con ol o a ec o o i m cha ac e is ics ha may a ec
i m inno a ion. Table 1 epo s he a iable de ini ions, including he dependen and
independen a iables.
3.3. Da a
Ou sample con ains 1,279,690 i m-yea obse a ions o 323,885 Chinese indus ial
i ms du ing 1998–2011. We collec i m-le el da a om he Annual Su ey o Indus ial
En e p ise (ASIE) by he Na ional Bu eau o S a is ics o China, which includes comp e-
hensi e inancial in o ma ion on SOEs and non-SOEs ac oss Chinese p e ec u e-le el
ci ies. We ob ain in o ma ion o banking inancial ins i u ions om he websi e o he
China Banking and Insu ance Regula o y Commission, which p o ides eliable da a o
us o calcula e he bank compe i ion a he p e ec u e le el. These obse a ions cons i u e
an unbalanced panel.
Table 2 p esen s he summa y s a is ics o he a iables o bo h p e ec u e-yea and
i m-yea obse a ions. The co ela ion coe icien s among he independen a iables a e
no highe han 0.51. The e o e, mul icollinea i y is no an issue in he eg essions.
4. Empi ical esul and discussion
4.1. Baseline speci ica ion and esul
Table 3 epo s he eg ession esul s es ima ing models (1) o (4). Columns 1 o 4 in
Table 3 only con ol o egional ixed e ec s, indus y ixed e ec s, and yea ixed e ec s
excep o he le el o bank compe i ion. The coe icien s a e nega i e and signi ican a
Table 1. Va iable de ini ions.
Va iable De ini ion
Ln_Inno a ion The loga i hm o a i m’s new p oduc alue (in housands o Chinese yuan)
Ra io_Inno a ion The a io o a i m’s new p oduc alue di ided by i s g oss indus ial ou pu alue (%)
B anchCR4 The a io o he Big Fou s a e-owned comme cial banks b anches o all comme cial banks b anches
a he p e ec u e le el
B anchHHI The He indahl index o he Big Fou s a e-owned comme cial banks b anches o all comme cial
banks b anches a he p e ec u e le el
Size The loga i hm o a i m’s o al asse s (in housands o Chinese yuan)
Age The numbe o yea s since a i m’s ounding yea
K_L The loga i hm o a i m’s capi al- o-labou a io, in which capi al is ep esen ed by ixed asse s and
labou is ep esen ed by he numbe o employees (in housand Chinese yuan pe pe son)
Le e age Le e age a io, de ined as deb di ided by o al asse s
ROA The a io o a i m’s p o i o i s o al asse s
Subsidy The loga i hm o he amoun o subsidies om he go e nmen (in housands o Chinese yuan)
Tangibili y The a io o a i m’s angible ixed asse s o i s o al asse s
Indus y-HHI The He indahl index o ou -digi SIC indus y o i ms, measu ed a he end o he iscal yea based
on sales
S a e- a io The pe cen age o a i m’s sha es held by s a e sha eholde s
S a e-owned A dummy a iable ha akes he alue o one i he s a e is he ul ima e con olling sha eholde o
a i m and ze o o he wise
Fo eign- a io The pe cen age o a i m’s sha es held by o eign sha eholde s
Fo eign-owned A dummy a iable ha akes he alue o one i a o eign sha eholde is he ul ima e con olling
sha eholde o a i m and ze o o he wise
Opaci y The loga i hm o he a io o a i m’s o al asse s o i s ixed asse s
Ln_R&D The loga i hm o a i m’s esea ch and de elopmen expendi u es (in housands o Chinese yuan)
Ra io_R&D The a io o a i m’s esea ch and de elopmen expendi u es di ided by i s o al sales (%)
JOURNAL OF APPLIED ECONOMICS 525
i m inno a ion is di e en be ween o eign i ms and domes ic i ms. We di ide he
i ms in o wo subsamples acco ding o he con olling sha eholde s o i ms (i.e., o eign
i ms and domes ic i ms). We expec ha domes ic i ms a e mo e sensi i e o changes
in bank compe i ion han o eign i ms, which is suppo ed by he esul s in Table 7.
In columns 1 o 8 o Table 7, he coe icien es ima es o bank compe i ion a e no
signi ican o o eign i ms, while coe icien es ima es o bank compe i ion a e nega i e
and signi ican o domes ic i ms. Mo eo e , he coe icien es ima es o bank compe i-
ion in columns 5 o 8 ha e highe absolu e alues han hose in columns 1 o 4. Howe e ,
inno a ion o domes ic i ms show sensi i i y o bank compe i ion, bu o o eign i ms,
he esul s e eal no signi ican sensi i i y o bank compe i ion. The esul s in columns 9,
10, 13, and 14 o Table 7 e eal no e ec s o bank compe i ion on inno a ion o o eign
i ms. The esul s in columns 15 and 16 sugges ha he posi i e in luence o bank
compe i ion on i m inno a ion is lowe o o eign i ms han o domes ic i ms. Fo
example, in column 15 o Table 7, he coe icien o B anchCR4 demons a es ha each
ex a p opo ion o bank compe i ion inc eases i m inno a ion by 1.733 bps o domes-
ic i ms. The signi ican and posi i e coe icien on B anchCR4× Fo eign-owned implies
ha he posi i e e ec o bank compe i ion on inno a ion is 0.980 bps weake o o eign
i ms compa ed wi h domes ic i ms. Speci ically, each ex a p opo ion o bank compe-
i ion con ibu es o a 0.753 bps (1.733–0.980) inc ease in inno a ion o o eign i ms.
4.4. Robus ness es s
This subsec ion checks he obus ness o he main indings using se e al app oaches. The
es ima ion esul s a e epo ed in Table 8.
Fi s , we pe o m a sensi i i y analysis wi h di e en measu es o he independen and
dependen a iables. Speci ically, columns 1 and 2 in Table 8 check whe he he esul s
a e obus o using he expansion o ci y comme cial banks, De egula ion, as an al e -
na i e p oxy o bank compe i ion. The a iable is de ined as he a io o c oss- egional
b anches o ci y comme cial banks o all comme cial banks b anches a he p e ec u e
le el, wi h highe alues indica ing mo e in ense bank compe i ion. No e ha be o e
2006, he Chinese go e nmen es ic ed ci y comme cial banks om se ing up b anches
ac oss p e ec u e-le el adminis a i e egions. In 2006 and 2009, ha con ol policy was
g adually elaxed. The coe icien s o De egula ion in columns 1 and 2 ha e opposi e signs
compa ed wi h he coe icien s o bank compe i ion in Table 3, and he posi i e and
signi ican coe icien s o De egula ion sugges ha he es ablishmen o c oss- egional
ci y comme cial banks b anches is conduci e o i m inno a ion. In addi ion, columns 3
o 6 use al e na i e p oxies, Ln_R&D and Ra io_R&D, o he i m inno a ion a iables
(see Table 1). The coe icien s o B anchCR4 and B anchHHI a e nega i e and signi ican
a he 1% le el, which imply ha bank compe i ion has a posi i e in luence on i ms’
R&D expendi u es and align wi h he esul s in Table 3. These esul s con i m he
obus ness o ou esul s and p o ide addi ional suppo o Hypo hesis 1.
Second, columns 7 o 10 in Table 8 include he squa e e ms, B anchCR4
2
and
B anchHHI
2
, o he bank compe i ion measu e o conside a possible non-linea ela ion
be ween bank compe i ion and i m inno a ion. The esul s show ha he linea e ms o
bank compe i ion, B anchCR4 and B anchHHI, a e signi ican ly nega i e and he squa ed
e ms a e signi ican ly posi i e. Speci ically, he h esholds o bank compe i ion a e 0.988
532 P. LIU AND H. LI
Table 7. Bank compe i ion and i m inno a ion: he ole o o eign owne ship.
Fo eign i ms Domes ic i ms
G oup Ln_Inno a ion Ra io_Inno a ion Ln_Inno a ion Ra io_Inno a ion
Dependen a iable (1) (2) (3) (4) (5) (6) (7) (8)
B anchCR4 0.095
(0.118)
0.872
(0.582)
−0.635***
(0.107)
−2.131***
(0.406)
B anchHHI 0.414
(0.302)
1.184
(1.454)
−1.489***
(0.309)
−4.725***
(1.150)
Con ol a iables Size, Age, K_L, Le e age, ROA, Subsidy, Tangibili y, Indus y-HHI, Regional FE, Indus y FE, Yea FE
Obse a ions 202,560 202,560 202,560 202,560 1,077,130 1,077,130 1,077,130 1,077,130
R
2
0.133 0.133 0.074 0.074 0.185 0.185 0.103 0.103
(9) (10) (11) (12) (13) (14) (15) (16)
B anchCR4 −0.488***
(0.093)
−1.572***
(0.363)
−0.501***
(0.095)
−1.733***
(0.368)
B anchHHI −1.190***
(0.278)
−3.694***
(1.042)
−1.235***
(0.286)
−4.183***
(1.065)
Fo eign- a io −0.482***
(0.015)
−0.483***
(0.015)
−1.757***
(0.073)
−1.746***
(0.072)
B anchCR4× Fo eign- a io 0.035
(0.072)
0.958***
(0.351)
B anchHHI×Fo eign- a io 0.184
(0.191)
2.977***
(0.909)
Fo eign-owned −0.432***
(0.014)
−0.432***
(0.014)
−1.584***
(0.068)
−1.573***
(0.067)
B anchCR4× Fo eign-owned 0.073
(0.069)
0.980***
(0.329)
B anchHHI×Fo eign-owned 0.285
(0.181)
3.088***
(0.844)
Con ol a iables Size, Age, K_L, Le e age, ROA, Subsidy, Tangibili y, Indus y-HHI, Regional FE, Indus y FE, Yea FE
Obse a ions 1,279,690 1,279,690 1,279,690 1,279,690 1,279,690 1,279,690 1,279,690 1,279,690
R
2
0.172 0.172 0.094 0.094 0.172 0.171 0.094 0.094
To sa e space, we do no epo he coe icien es ima es o some o he con ol a iables. Robus s anda d e o s a e in pa en heses. Fo eign- a io is a con inuous a iable. In columns 9, 10, 11,
and 12, B anchCR4, B anchHHI, and Fo eign- a io a e mean cen ed o he cons uc ion o he in e ac ion e ms. Fo eign-owned is a dummy a iable. In columns 13, 14, 15, and 16, B anchCR4
and B anchHHI a e mean cen ed o he cons uc ion o he in e ac ion e ms. ***, **, and * deno e signi icance a he 1%, 5%, and 10% le els, espec i ely.
JOURNAL OF APPLIED ECONOMICS 533
Table 8. Resul s o he obus ness es s.
Ln_Inno a ion Ra io_Inno a ion Ln_R&D Ra io_R&D Ln_Inno a ion Ra io_Inno a ion Ln_Inno a ion Ra io_Inno a ion Ln_Inno a ion Ra io_Inno a ion
Dependen
a iable (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18)
De egula ion 86.49***
(6.657)
109.7***
(25.83)
B anchCR4 −0.173***
(0.028)
−0.069***
(0.013)
−1.365***
(0.252)
−3.846***
(1.099)
−0.773***
(0.089)
−0.785**
(0.383)
−0.585***
(0.036)
−1.884***
(0.177)
B anchCR4
2
0.691***
(0.195)
1.737**
(0.875)
B anchHHI −0.636***
(0.077)
−0.309***
(0.035)
−1.694***
(0.513)
−5.333**
(2.145)
−2.088***
(0.267)
−2.345**
(1.079)
−1.411***
(0.100)
−4.417***
(0.478)
B anchHHI
2
0.982*
(0.586)
3.185*
(1.716)
Con ol
a iables
Size, Age, K_L, Le e age, ROA, Subsidy, Tangibili y, Indus y-HHI
Regional FE Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No No No
Indus y FE Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No No No
Yea FE Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No No No
Fi m No No No No No No No No No No No No No No Yes Yes Yes Yes
Obse a ions 1,279,690 1,279,690 627,128 627,128 627,128 627,128 1,279,690 1,279,690 1,279,690 1,279,690 1,279,690 1,279,690 1,279,690 1,279,690 1,279,690 1,279,690 1,279,690 1,279,690
R
2
0.170 0.093 0.207 0.207 0.056 0.056 0.170 0.170 0.093 0.093 0.706 0.706 0.621 0.621 0.170 0.170 0.093 0.093
To sa e space, we do no epo he coe icien es ima es o some o he con ol a iables. Robus s anda d e o s a e in pa en heses. Va iable de ini ions a e p o ided in Table 1. ***, **, and * deno e
signi icance a he 1%, 5%, and 10% le els, espec i ely.
534 P. LIU AND H. LI
(column 7), 0.863 (column 8), 1.108 (column 9), and 0.837 (column 10). Be o e bank
concen a ion eaches a ce ain le el, an inc ease in bank concen a ion hinde s i m
inno a ion. A e bank concen a ion c osses he in lec ion poin , i p omo es i m
inno a ion. Acco ding o s a is ical da a, he bank concen a ion is less han hese
in lec ion poin alues in mos egions o China, so he ela ionship be ween bank
compe i ion and i m inno a ion mainly occu s on he le side o hese in lec ion poin s.
Tha is, a ise in bank concen a ion (i.e., bank compe i ion dec eases) leads o a decline
in i m inno a ion. The analysis o he non-linea ela ionship be ween bank compe i ion
and i m inno a ion e eals ha he coe icien s o bank compe i ion emain bo h
signi ican ly and economically ele an .
Thi d, columns 11 o 18 o Table 8 examine whe he he documen ed e ec s o bank
compe i ion on i m inno a ion a e obus o al e na i e speci ica ions o he main
models. Speci ically, columns 11 o 14 check whe he he main esul s a e obus o
con olling o egional, indus y, and yea ixed e ec s and clus e ing e o s a he i m
le el. Columns 15 o 18 es whe he he main esul s a e obus o es ima es wi h i m
ixed e ec s. In columns 11 o 18 o Table 8, he coe icien es ima es o B anchCR4 and
B anchHHI a e signi ican ly nega i e and consis en wi h he baseline esul s, which
con i m he obus ness o ou esul s.
5. Conclusion
This s udy examines how changes in bank compe i ion a ec i m inno a ion and high-
ligh s he he e ogeneous e ec s o bank compe i ion based on i m size and owne ship
using a sample o i ms in China om 1998 o 2011. The esul s show ha bank
compe i ion and i m cha ac e is ics esul in di e ences o i m inno a ion.
Speci ically, his s udy p o ides e idence ha bank compe i ion p omo es i m inno a-
ion. Bank compe i ion has a g ea e posi i e e ec on inno a ion o small i ms,
anspa en i ms, non-SOEs, and domes ic i ms, whe eas i has less in luence on opaque
i ms, and SOEs. The e is no conclusi e e idence ha bank compe i ion a ec s he
inno a ion o o eign i ms. In addi ion, we ind ha bank compe i ion is bene icial o
i ms o inc ease R&D in es men , and he expansion o ci y comme cial banks is
bene icial o i m inno a ion. Bank compe i ion may expand i ms’ access o unds
and alle ia e i ms’ inancial cons ain s, hus p omo ing in es men in inno a ion
p ojec s.
Inno a ion is an impo an d i ing o ce o economic g ow h, so he impo ance o
hese conclusions goes beyond he e ec s on i m inno a ion. This s udy makes a case
o banking e o ms o p omo e small and medium-sized banks and o enhance bank
compe i ion in de eloping economies, which a e e ec i e in educing c edi disc imi-
na ion and p omo ing i m inno a ion. Mo eo e , due o c edi disc imina ion, non-
SOEs and small i ms ace mo e di icul ies in ob aining ex e nal inancing han SOEs
and la ge i ms. S a e owne ship o i ms may esul in low e iciency as a esul o he
implici deb gua an ee and ine ec i e supe ision, implying ha p i a ising SOEs and
educing go e nmen in e en ion would be e ec i e ways o p omo e capi al alloca-
ion e iciency. These sugges ions a e ins uc i e o he e o ms o SOEs and he
ma ke isa ion o ansi ion economies, and may he e o e be mo e impo an o policy
make s.
JOURNAL OF APPLIED ECONOMICS 535
The analysis could be ex ended using a a ie y o me hods o examine bo h he
ele ance o hese in e p e a ions and he gene al applicabili y o he esul s o o he
de eloping coun ies. Howe e , he e a e some de iciencies in his s udy. Since we did no
ob ain e e y loan in o ma ion each i m ob ained om di e en banks, we he e o e had
o measu e he ex e nal inancing o he i m based on i s o al loan amoun . Acco ding o
ins i u ional economics heo y, China’s economic success should no ha e happened
because o i s impe ec legal sys em and excessi e go e nmen in e en ion. The e o e,
we a gue ha he cu en ins i u ional en i onmen hides an al e na i e ins i u ional
a angemen which eplaces o mal ins i u ions in some unds alloca ion p ojec s. This
al e na i e ins i u ional a angemen may be an in o mal ule based on co up ion ac s,
such as b ibe y. The e o e, he e ec s o co up ion on i m inancing and inno a ion a e
ano he sugges ions o u u e s udy.
Disclosu e s a emen
No po en ial con lic o in e es was epo ed by he au ho s.
Funding
This s udy is suppo ed by he Humani ies and Social Science p ojec o Minis y o Educa ion o
China [g an numbe 20YJC790079].
No es on con ibu o s
Peisen Liu, PhD, is a Lec u e a he depa men o Economics, College o Economics and
Managemen , Sou hwes Uni e si y. His eaching and esea ch ields a e Financial Economics
and Con empo a y Chinese Economy. D . Liu has inished his PhD S udies a he Chongqing
Uni e si y, China. He has published o e 20 pape s in jou nals. ORCID h ps://o cid.o g/0000-
0002-2842-330X
Houjian Li, PhD, is an P o esso a he depa men o Economics, College o Economics, Sichuan
Ag icul u al Uni e si y. His eaching and esea ch ields a e Ru al Coope a i e O ganiza ional
Beha io , In e ne Economics and Fi m Inno a ion, and Financial Risk Managemen . D . Li has
inished his PhD S udies a he Chongqing Uni e si y, China. He has published o e 70 pape s.
ORCID h ps://o cid.o g/0000-0003-4852-8042
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