The Impact of an Increase in Bank Competition on Export Product Quality: Evidence from China

Abstract

Few studies specifically testified to how increased bank competition affects export product quality. This paper fills this gap in this area by examining whether and how increased bank competition affects export product quality. The core results of our findings are as follows. First, the statistical analysis results show that a series of bank reforms have enhanced competition in the banking industry in China. Second, the theoretical model shows that bank reform positively influences export product quality. Subsequently, employing a panel sample of 77,817 firms that exported 4,787 products (HS-6) to 230 destinations from 2000 to 2006, we adopt a difference-in-differences approach to test the association between a rise in bank competition and the quality of exported products. The baseline results which are robust in different model settings support that an increase in bank competition increases export product quality. The further empirical test shows that increased bank competition upgrades export product quality through the following channels: bank competition increase leads to enterprises’ financial stability enhancement which, in turn, leads to R&D investment upgrading which then leads to export product quality enhancement. Finally, the heterogeneity checks documented that the positive effect of bank competition upgrading on export product quality is pronounced for non-SOEs, and for firms in both the growth and mature stages. Moreover, an increase in bank competition makes financial resources more accessible in areas with weak financial infrastructure. Our findings shed light on the policy implications for emerging economies. Our study expands the theoretical framework of bank competition research on export product quality and inspires the development of strategies for exporting enterprises.