Does credit market impede innovation? Based on the banking structure analysis

This paper asks whether the credit market impede innovation. Using a province- and industry-level innovation dataset combined with regional loan structure in Chinese credit market during 1999-2007, we identify two measures to proxy Chinese banking structure, the long-term vs. short-term bank loans and the Big-Four vs. non-Big-Four banks, which affect technological innovation. We show that industries that are more dependent on external finance exhibit disproportionally higher level of innovation in provinces with a larger share of the long-term bank loan market. However, a larger share of the short-term bank loan market appears to discourage innovation in industries with more dependence on external finance. Moreover, the positive effect of the long-term bank loans on innovation is strengthened in provinces with a higher level of market share of the non-Big-Four banks, whereas the negative effect of the short-term bank loans on innovation is mitigated in those provinces. This study provides evidence on the positive effect of the credit market on innovation.