To what extent does bank financing matter for innovation? Evidence from Chinese listed firms. By Hong Bo

Hong Bo (SOAS)

This presentation features the working paper - " To what extent does bank financing matter for innovation? Evidence from Chinese listed firms " by Alessandra Guariglia, Hong Bo, and Xiaosheng Ju

Abstract

Using a panel of 1774 Chinese listed firms over the period 2007-2014, we examine the role played by different sources of financing in supporting R&D investment. We find that, contrary to what is typically observed in mature economies, bank loans play an important role in funding R&D investment in China. We also show that banks are more likely to direct funds towards those firms whose R&D investment is already supported by a government grant. The receipt of the grant in fact provides the bank with a signal that the firm’s R&D project is valuable. This signaling effect is particularly important for non-state-owned firms, for young firms, for firms facing high demand uncertainty, and for firms operating in less financially developed provinces. As these groups of firms are all more likely to face asymmetric information problems and financing constraints, we conclude that bank lending aimed at financing firms’ R&D investment in China follows market principles. Our results are robust to using various estimation methods and to excluding the financial crisis years from our sample.