Local Financial Development Research Articles

The impact of supply chain finance on financial constraints of small and medium-sized enterprises and the moderating factors

ABSTRACT Supply chain finance (SCF) has gained significant popularity and has been extensively implemented in practical applications to facilitate cash flow by involving financial institutions. However, there are very few empirical studies on SCF. This study examines whether and how much SCF can alleviate financial constraints of small and medium-sized enterprises (SMEs). Furthermore, we examine the impact of information asymmetry, financial development depth, and economic policy uncertainty on the effectiveness of SCF. These three moderating factors correspond to the influence of firms, local financial development, and national government on SCF effectiveness, respectively. The empirical analysis shows that SCF can alleviate SMEs’ financial constraints significantly, and this effect is more pronounced for firms with higher information disclosure quality and located in financially developed areas. Our findings have important implications for firms and authorities, such as understanding the dynamics of SCF and developing appropriate measures and frameworks to promote the broad adoption and effective utilization of SCF.

Unveiling the role of city commercial banks in influencing land financialization: Evidence from China

Local financial development is crucial for advancing regional financial supply side structural reform, enabling local governments to leverage financial instruments to effectively mobilize land resources and foster competitive growth. The introduction of numerous financial products linked to land-related rights and interests has resulted in a pronounced transmission and interconnection of fiscal and financial risks across regions. This study examines the impact of local financial development on land financialization in China using panel data from prefecture-level cities and detailed information on land mortgages. The findings indicate that the establishment of city commercial banks (CCBs) contributes to the progress of land financialization by incentivizing local government financing vehicles to participate in land mortgage financing, increasing the transfer of debt risks to the financial sector. Notably, the impact of CCBs on land financialization is more pronounced in regions with urban agglomeration, high GDP manipulation, inadequate local financial regulation, and robust implicit government guarantees. Further analysis reveals that CCB establishment has negative spillover effects on land financialization in neighboring areas, while expansion strategies such as establishing intercity branches, engaging in cross-regional mergers, and relaxing regulations have mitigated the rise of land financialization at the regional level. This study provides policy recommendations that focus on reducing local governments’ reliance on land financing and enhancing the prevention and management of financial risks.

Fiscal decentralization and the transformation of regional energy structures in China: Spatial spillover effects and the mediating role of technological innovation

The transformation of regional energy structures plays a pivotal role in enhancing ecological quality and advancing national green development efficiency. However, this transformation is characterized by dual externalities, necessitating governmental intervention to rectify market failures. Therefore, this study focuses on the critical influence and mechanisms through which local governments affect regional energy structure transformation, particularly within the context of China's unique fiscal decentralization. This study explores the impact of fiscal decentralization on the transformation of China's regional energy structures and its spatial correlations. Employing a bidirectional fixed-effect model and a spatial Durbin model, we analyze Chinese provincial panel data from 2002 to 2021 to explore the effects of fiscal decentralization on regional energy structure transformation and its spatial spillover. Findings reveal that fiscal decentralization significantly enhances the efficiency of regional energy structure transformation, with an effect coefficient of 0.127. Additionally, the fiscal decentralization mechanism positively influences spatial spillover effects on regional energy transformation, with these effects becoming more pronounced alongside higher degrees of economic agglomeration. Moreover, local governments are found to foster regional scientific and technological innovation, thereby facilitating adjustments in the regional industrial structure and promoting energy structure transformation. The intermediary effect test highlights the role of local governments in promoting scientific and technological advancements that drive industrial restructuring and energy transformation. The study recommends for a long-term strategy to balance central and local financial development, aiming to enhance the efficiency of regional energy structure transformation. These findings offer a theoretical foundation and policy recommendations for optimizing and transforming energy structures in pursuit of China's green and high-quality development goals. These findings offer globally relevant insights into leveraging fiscal decentralization for energy structure transformation, supporting sustainable development and green growth worldwide.

The impact of judicial prejudice in bankruptcy on creditors and local financial development

In this research, we explore the implication of judicial prejudice in bankruptcy for creditor interests and local financial market development. Based on prefecture-level data, we find compelling evidence that judicial prejudice leads to capital market frictions. Regions with stronger judicial prejudice have higher borrowing costs. Moreover, judicial prejudice is negatively related to local financial market development. In sum, our research sheds light on the impact of judicial prejudice on financial market development.

How Local Finance and Enforcement Shaped SME Credit Choices before and during the COVID Crisis

Credit from suppliers is an important source of finance for firms. It can sustain firms’ financial flexibility even in periods of downturn. In this study, using a large database of 90,763 Italian firms in the 2015–2021 period, we investigated how local financial development affects the trade-credit policies of SMEs and how this effect is conditioned by the degree of judicial enforcement. Given that trade credit can be a substitute for bank financing, we find that firms make more use of trade credit in developed financial markets. Moreover, we highlight the finding that a higher degree of judicial enforcement, which reinforces the role of contracts in the market, amplifies this effect. Finally, we observe that the COVID-19 crisis has reduced both the positive effect of local financial development and the positive moderating effect of enforcement in the use of trade credit.

The impact of the digital economy on low-carbon innovation in the Yangtze River Delta region.

This study narrows its focus to the Yangtze River Delta, an important region in China known for its advancements in both digital economy and low-carbon technology. In contrast to previous studies, we also examine the heterogeneous effects between central and non-central cities, as well as the role of local financial development, when analyzing the impact of the digital economy on low-carbon innovation. Based on the data of 41 cities from 2011 to 2019, we find a significant direct promoting effect of the digital economy on low-carbon innovation. Furthermore, the development of the digital economy indirectly enhances low-carbon innovation through local financial development. The heterogeneous analysis reveals a positive impact of the digital economy on low-carbon innovation in both central and non-central cities, with a stronger effect observed in non-central cities. These findings suggest several policy recommendations, including promoting digital economy and finance, green finance, and fostering regional integration in the Yangtze River Delta.

The impact of local financial development and corruption control on firm efficiency in Vietnam: evidence from a geoadditive stochastic frontier analysis

In this paper, we use a geoadditve Bayesian stochastic frontier analysis to empirically assess the impact of provincial-level financial development, corruption control, and their interaction on firm efficiency in Vietnam. Using panel data from more than 40,000 Vietnamese firms during 2006-2013, we find that financial development decreases firm efficiency, while corruption control promotes it. Moreover, financial development and corruption control interact positively in affecting firm efficiency. Our results imply that corruption control not only enhances firm efficiency directly by reducing unnecessary regulatory burdens, costs, and delays, but it also offsets potential inefficiencies that arise from increased financial development.

Will Local Financial Development Affect the Competitive Advantage of Chinese Enterprises' Exports?

Many studies confirm the impact of financial development on the macro economy, but systematic studies of the impact of financial development on corporate exports is still lacking. Based on the quasi-natural experiment established by city commercial banks, this paper uses micro-data of Chinese industrial enterprises from 1998 to 2013 and adopts a double difference method to test the impact of the development of local financial institutions on corporate exports. The results show that the establishment of city commercial banks has significantly increased the export participation rate and total export volume of manufacturing enterprises in the city where they are located; comparatively speaking, its impact on the export expansion margin of industrial enterprises exceeds the intensive margin. At the same time, the study also found that the above-mentioned influences exist in both long-term and short-term, and in enterprises of different sizes and attributes. These findings provide new evidence for understanding the relationship between local financial development and corporate exports.

Local financial development and the growth of small firms in Vietnam

This paper examines whether heterogeneities in financial development among Vietnamese provinces matter for firm growth in Vietnam. Using a nationally representative firm survey that covers more than 41,000 firms for the period 2009 − 2013, we estimate the impact of provincial financial development on the growth rates of firms by accounting for sectoral differences in growth opportunities. We find that province-level financial development promotes the growth rates of sales, investment and sales per worker of small firms, and reduces the growth rate of the wage-to-sales ratio. Our results imply that firms grow faster in provinces with a higher level of financial development. Moreover, the effect of financial development on growth rates is larger when firms operate in sectors with better growth opportunities.

An Empirical Study on the Relationship between Economy and Finance in Underdeveloped Areas Based on the VAR Model

In recent years, the level of local economic, social, and financial development had been greatly improved. However, due to the large gap between regions, the economic and financial industries in underdeveloped regions restricted the further development of the whole national economy to a great extent. It was known from the existing research that economic development was inseparable from the support of the financial industry, but the role of the financial industry in the process of regional economic development had not attracted attention. Therefore, from the perspective of economic development in underdeveloped areas, this paper put forward relevant assumptions by analyzing the relationship between economic growth and financial factors. In view of the development of financial industry in underdeveloped areas, this paper mainly analyzed from three aspects: banking, securities, and insurance, and selected corresponding indicators to observe the changes of banking, security, market and insurance market. Vector autoregressive model and vector error correction model were used to carry out cointegration test and Granger causality test for financial and economic-related indicators in underdeveloped areas. According to the impulse response function and variance decomposition results, this paper analyzed the dynamic relationship between financial development and economic growth, as well as the disturbance and duration of financial factors on economic development. The empirical results showed that the VAR model can better analyze the relationship between financial growth and economic growth, as well as the role of financial factors in the process of economic development. This study can provide reference for formulating financial development policies suitable for economic development.

The joint effects of financial development and the business environment on firm growth: Evidence from Vietnam

This work examines the complementary effects of local financial development and the business environment on the growth of Vietnamese firms. For the period from 2009 to 2013, we combine firm-level data covering more than 40,000 firms from the Vietnam Enterprise Survey with province-level data from the Vietnam Provincial Competitiveness Indicators. Our estimation strategy builds upon a novel copula-based estimator that accounts for potential endogeneity biases without requiring external instruments. Our results show that financial development and a favourable business environment generally promote firm growth, but some components of the business environment, such as low entry costs, access to land and business service support, foster firm growth more strongly than financial development. Most importantly, financial development and the business environment interact positively in their effects on firm growth. The impact of local financial development on firm growth is higher in provinces with a competitive business environment. Conversely, improvements in provincial competitiveness have a greater impact on firm growth in provinces with a more developed financial sector. The results clearly show that policies to promote local financial development need to be coordinated with measures to improve the broader business environment.

Financial Development, Environmental Regulations and Green Economic Transition

With the global deterioration of ecology and the widening of inequality, achieving green, inclusive and sustainable economic growth has received worldwide recognition. The essence of green transition is the revolution of development mode, which requires a large amount of environmental investment, including enterprise pollution control and green RD on the other hand, the supply capacity of green funds by the financial sector also needs to be improved, so as to reduce the environmental financing constraints faced by enterprises. Therefore, financial development and environmental regulations can produce synergy at both ends of supply and demand of environmental investment and have a coordination effect on green economic transition. This paper exploits a comprehend dataset on the information of industrial production, pollution emission and green innovation of 284 cities in China from 2004 to 2015 to test the coordination effect. In recent years, the innovation and development of China’s financial system are reflected in local small financial institutions, in which the development of city commercial banks (CCB) has become an important symbol. With information advantages, more flexible supervision and diversified ownership structure, CCB can reduce information asymmetry in the lending process and alleviate the financing constraints faced by enterprises. Measuring the urban financial development based on the increase in the branches of CCB, this paper finds that local financial development can significantly reduce the industrial SO2 emission, the main pollutant in cities, in coordination with environmental regulations. The mechanism analysis shows that financial development and environmental regulations can synergistically promote industrial pollution control and green technological innovation, which reduces the emission intensity of industrial pollution and promotes the rise of green industry, thus promoting industrial green transition, without significant reduction of production. The conclusions remain stable after a series of endogenous and robustness tests. Heterogeneity analysis also reveals that environmental information asymmetry, the shortage of market intermediary service agency and the weak of the ability of technology commercialization will impair the coordination effect. The contributions of this paper are mainly reflected in two aspects: First, it reveals the factor of financial development in affecting green economic transition, which enriches the existing literature on financing constraints, financial development and economic green transition, and also provides useful policy enlightenment for the development of green economy. It is necessary to not only strictly implement environmental regulations, but also pay attention to the financial support and guidance role of the financial sector, so as to promote enterprises’ pollution control and green R&D innovation. Second, to improve the supply capacity of green funds, China needs to not only deepen the reform of the financial system and make up for the shortcomings existing in the financial system, but also further improve the relevant supporting systems required for the development of green finance, including improving the enterprise environmental information disclosure and sharing mechanism, developing green financial intermediary service agency, and cultivating professional technical management talents, so as to improve the operational ability of green financial business during the supply of green funds.

Impacts of social trust on corporate leverage: Evidence from China

This study investigates the effects of social trust on corporate leverage in China with the data of listed companies and Chinese General Social Survey. Results reveal that social trust has a positive impact on corporate leverage, and this result remains robust when terrain is used as an instrumental variable. Social trust also further affects corporate leverage in central cities with high gross domestic product per capita, indicating that the impacts of social trust depend on local development as well. Social trust has similar impacts on long- and short-term leverage, but it does not affect commercial credit leverage like how it affects bank credit leverage. The possible channels are through the corporate responsibility to shareholder and local financial development. Another impact of social trust on leverage is through that of liabilities. Furthermore, improving local formal institutions may change the effects of social trust. Our results remain unchanged after robustness checks.

Foreign direct investment and regional innovation: Evidence from China

AbstractThis paper studies the impact of foreign direct investment (FDI) on regional innovation, which is measured by patent applications and patent citations, based on city‐level data in China from 1995 to 2015. Using an instrumental variable approach, this paper demonstrates that FDI not only promotes the quantity of regional innovation, but also improves the quality of regional innovation in China. The findings are robust to various specifications of the empirical model and measurements. In addition, we highlight the channel of improving local absorptive capacity and market competition through which FDI exerts positive influence on regional innovation, and show that FDI acts as a substitute for local financial development to raise regional innovation.

Clean energy, financial development, and economic growth: Evidence from spatial spillover effects and quasi-natural experiments

This paper, firstly, investigates the relationship between clean energy and economic growth using satellite remote sensing data to proxy economic activities. Then, this paper constructs a spatial autoregressive model, spatial error model, and spatial Durbin model to study the spatial spillover effects of financial development and clean energy. Further, this paper adopts the difference-in-differences (DID) model and the propensity score matching-DID (PSM-DID) method to conduct quasi-natural experiments on clean energy and examine whether China's energy policy can promote clean energy, thereby promoting economic growth. The analysis results reveal a positive correlation between clean energy and economic growth; local financial development promotes clean energy in the region but negatively impacts the clean energy in surrounding areas. Moreover, the findings confirm a significant positive relationship between the “policy treatment effect” and clean energy. Finally, we put forward relevant policy recommendations based on the empirical results.

Local financial development and cash holdings in Italian SMEs

In this article, we investigate the effect of local financial development on cash holdings of Italian small and medium-sized enterprises (SMEs). Consistent with the hypothesis that local financial development reduces the need to hold precautionary cash because it facilitates access to bank debt, we find that local financial development measured by the density of bank branches in Italian provinces has a negative effect on corporate cash holdings. This effect is driven by SMEs with bank debt. Furthermore, the negative effect of local financial development on cash holdings only exists for younger and smaller SMEs, which are more likely to benefit from increased local financial development. Our work highlights that local financial development is an important driver of policies on holding cash by SMEs and is particularly relevant during crisis periods, such as the recent COVID-19 crisis.

Nonlinear relationship between economic growth and nuances of globalisation with income stratification: Roles of financial development and governance

We study the effect of overall globalisation on economic growth in a neoclassical macroeconomic growth model. We further assess our model by considering the decomposed measures of globalisation including economic, political, and social globalisation components. To this end, we estimate panel data models by applying the cross-sectional dependency-autoregressive distributed lags (CS-ARDL) approach to a sample of 116 countries during the available period, 1980–2015. We classified our sample into upper middle-, lower middle-, and high-income groups to minimise country-specific heterogeneity. Our results affirm the presence of a quadratic (nonlinear) U-shaped relationship between the overall globalisation (including the economic, political, social components) and economic growth for the lower middle- and upper middle-income group. However, they provide evidence of a positive linear relationship between globalisation and economic growth for the high-income countries. Given the arguments that the impact of globalisation on growth is conditional on local financial development (FD) and quality of governance (QoG), we incorporate their role. We provide fresh evidence that the impacts of globalisation on economic growth are more profound in the countries with a higher QoG and a higher deepening of FD. We further check the robustness of our analysis applying the U test and dynamic generalised methods of moment approach. We also provide policy implications.

Optimal branching strategy, local financial development, and SMEs’ performance

This paper examines whether and to what extent development of the local-level financial sector improves SMEs’ performances. While only a handful of studies examines the relationship between local financial development and firm growth, no theoretical basis has been provided in those studies to understand transmission channels and instruments through which local financial development works in favor of firm growth. This paper attempts to fill that gap. In a theoretical framework, this paper shows that an optimal number of bank branches in an area works as an instrument of the transmission channel from financial development to growth, which helps reduce excess liquidity and increase SMEs’ access to bank credit by creating links between the demand and supply of liquidity. Banks default credit risk and cost of branch expansion determine the optimal number of branches in an area: a higher number of branches will reduce asymmetry of information about borrowers and monitoring costs, leading to lower default risks. Using new firm-level survey data of 1084 SME manufacturing firms from Bangladesh, our empirical analysis suggests that there is a threshold level of bank branches that can improve SME performance at the sub-district level. Our findings highlight the importance of potential returns to an optimal branching strategy of banks at the sub-national level that will lead to inclusive finance and growth within a country.

The impact of local financial development on firm growth in Vietnam: Does the level of corruption matter?

We examine the effects of province-level financial development and corruption on the performance of Vietnamese firms in terms of the growth rates of sales, investment and sales per worker. Employing a large firm-level dataset of more than 40,000 firms for the period 2009–2013 and applying a heteroskedasticity-based identification strategy, we find that province-level financial development promotes firm growth, while corruption hinders it. Most importantly, the marginal effect of financial development on firm growth depends negatively on the level of corruption. Moreover, financial development exacerbates the growth-retarding effect of corruption.

Exchange rate risk and trade mode choice in processing trade: Evidence from Chinese data

AbstractThis study investigates the impact of exchange rate fluctuations on the trade mode choices of assembly firms. Using Chinese customs data, we show that exchange rate pass‐through (ERPT) depends on which party is responsible for sourcing inputs. Relative to passively receiving inputs under the pure assembly (PA) mode, foreign‐invested assembly firms mainly source inputs themselves through the import and assembly mode and enjoy lower ERPT. We find that the share of imports through PA increases with exchange rate fluctuations. This effect is more pronounced for firms in liquidity‐constrained industries and mitigated by better local financial development.