Digital finance and investment of micro and small enterprises: Evidence from China

Abstract

Using China Micro and Small Enterprise Survey data, this paper examines how digital finance affects the investment behavior of MSEs in China. We find that digital finance significantly increases both MSEs' probability of applying for new investment projects and the number of projects applied. Specifically, our baseline model shows that MSEs that use digital finance are 7.5% more likely to apply for new investment projects than those who do not. The average number of new investment projects applied by MSEs that use digital finance is also 37.8% higher. Results are further substantiated by conducting a set of additional tests to rule out the potential confounding factors and a propensity score matching strategy to address for the potential self-selection bias. Heterogeneous impacts of digital finance are also studied in this paper. We find that the impact of digital finance is more prominent for younger enterprises and enterprises located in the central and western regions where there is relatively backward financial development. In the end, the underlying mechanism is further explored and the result shows that digital finance promotes the investment behavior of MSEs by reducing the degree of information asymmetry between the lender and the borrower, which alleviates the financing constraints of MSEs.