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

The effects of bank competition on firm R&D investment: an inverted-U relationship 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/approachBased 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.FindingsThe 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/valueThis 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Chinese Management Studies Emerald Publishing

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

Xia, Yufeng; Liu, Peisen
Chinese Management Studies , Volume 15 (3): 26 – Jun 17, 2021
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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1750-614X
DOI
10.1108/cms-04-2020-0126
Publisher site
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Abstract

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/approachBased 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.FindingsThe 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/valueThis 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.

Journal

Chinese Management Studies – Emerald Publishing

Published: Jun 17, 2021

Keywords: Bank competition; Firm R&D investment; Inverted-U relationship; Financial constraint

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