Abstract
Using a panel data of listed companies, this paper studies how internal financing and external financing affect the innovative investment of Chinese industrial enterprises. It finds that internal fund is the primary source of financing for the innovative investment undertaken by Chinese nonfinancial firms and the role of external financing varies in the ownership structure of the firm. We find that for the centrally controlled State-Owned Enterprises (SOEs), bank loans is an important secondary source of financing for innovation, while for both local SOEs and listed non-SOEs bank loans are not important. External smoothing mechanisms also vary across types of ownership structure. We find that central SOEs mainly use bank loans to buffer against negative shocks to internal funds, while both local SOEs and listed non-SOEs use equity financing from the stock market for the same purpose. Our study shows that it is the accumulation of internal fund, rather than the development of formal financial sector, that contributes to the rapid growth of total innovative investment of Chinese firms.
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