Does Bank Competition Spur Firm Innovation?

This article contributes to the literature by examining how the increase in bank competition impacts firms' innovation and how firm size and firm ownership impact the effect of bank competition. Using data which includes the banking sector and firm information across Chinese prefecture-level city over the period 1998-2011. The robust evidence shows that bank competition improves firm-level innovation by firms headquartered within competing regions and find that the positive effect of bank competition is stronger for small and medium-sized enterprises (SMEs), non-state-owned enterprises (non-SOEs) and domestically-owned firms compared to large firms, SOEs, and foreign-owned firms, respectively. We also find that bank competition poses more beneficial effects on innovative performance for firms with more opaque, more dependent on external financing, high debt cost, and short operating years. Overall, these results provide light on the determinants of innovation and the real effects of bank competition