The impact of banking competition on firm total factor productivity

Abstract

The benefits of financial development to economic growth are conspicuous, but due to the heterogeneity across regions and firms, the effects of financial competition have not been fully proved. There is a puzzling phenomenon in many developing countries, that is, banking monopoly coexists with economic growth. This study uses industrial enterprise data to analyse how banking competition affects firm total factor productivity (T.F.P.) and the influence of firm size and ownership in this process. The results show that the competition in banking promotes firms to improve their T.F.P., which is realised by alleviating financing constraints of firms through increasing banking competition and aligns with the market power hypothesis. Moreover, banking competition enables small firms to improve their T.F.P. in regions with fewer state-owned banks branches and more small banks branches. Intensified competition in banking leads to an increase in the T.F.P. of private firms, but it has no effect on the T.F.P. of state-owned enterprises (S.O.E.s) and foreign firms. The expansion of bank branches and the cross region operation of city commercial banks are helpful to improve firm T.F.P. This study confirms the impact of competition caused by changes in bank branches on firms and the determinants of productivity.