The effects of bank competition on firm R&D investment: an inverted-U relationship

Abstract

Purpose

Bank financing is an important external financing source for firm research and development (R&D) investment. This study aims to use an exponential quadratic specification to investigate the effect of bank competition on firm R&D investment and its underlying mechanisms. Moreover, this study checks bank competition’s heterogeneous effects on firm R&D investment.

Design/methodology/approach

Based on data of Chinese manufacturing firms and bank branches, this study uses the Tobit estimator, instrumental variable method and Heckman two-step approach to test the relationship between bank competition and firm R&D investment.

Findings

The results show robustness evidence of an inverted-U relationship between bank competition and firm R&D investment. Specifically, increases in bank competition promote firm R&D investment until bank competition reaches the turning point and reduce firm R&D investment after crossing the turning point. Financing costs and financial constraints can explain the inverted-U relationship between bank competition and firm R&D investment. Heterogeneity examinations reveal that R&D investment is more sensitive to bank competition in non-state-owned enterprises, small firms and high-tech firms.

Originality/value

This study contributes to the literature on the relationship between bank competition and firm innovation. The authors investigate the heterogeneity of R&D investment influenced by bank competition and depict the economic effects brought by bank competition. This study sheds light on the real effects of bank competition and the determinants of firm R&D investment in transition economies. The conclusions provide empirical evidence for reducing credit discrimination and improving capital allocation efficiency in developing countries.

Citation

Xia, Y. and Liu, P. (2021), "The effects of bank competition on firm R&D investment: an inverted-U relationship", Chinese Management Studies, Vol. 15 No. 3, pp. 641-666. https://doi.org/10.1108/CMS-04-2020-0126