Does Financial Inclusion Create a Spatial Spillover Effect Between Regions? Evidence from China

Abstract

Promoting China’s development of financial inclusion requires understanding whether there is a spatial spillover effect between regions. First, this study applies improved Hotelling model to derive necessary conditions for spatial spillover effects to occur between regions as a result of financial inclusion. Results show that the difference in the service cost and unit distance cost which is also defined as flowing cost of financial inclusion determines the spatial spillover effects between regions. Second, constructing a financial inclusion index, we find the development of financial inclusion is better in the eastern region than in the central and western regions, but the gap gradually decreases from east to west. Third, we conduct an empirical analysis using a dynamic shift-share spatial model. The results show that the development of financial inclusion in the eastern and western regions has a structural disadvantage. In other words, eastern and western regions have negative spatial spillover effects on the central region. But the central region has not been completely affected and does well with respect to the availability and usage dimensions of financial inclusion. In the future, reducing costs of financial inclusion services and promoting positive spatial spillover effects can improve overall development of China’s financial inclusion.