Does banking competition stimulate regional innovation? Evidence from China

The evidence regarding the impact of banking competition on innovation activities is mixed in developed countries. China's bank sector is unique and controlled by the government. Scholars currently have a limited understanding of how banking competition affect innovation in developing countries with the different bank system. To help fill this gap, using Chinese prefecture-level cities from 2007 to 2018, this paper investigates the effect of banking competition on regional innovation.11A prefecture-level city is an administrative division that ranks below a province and above a county in China's administrative structure. Specifically, a prefecture is larger than a “city” in the usual sense of the word, namely, a continuous urban settlement. It is an administrative unit comprised of a main central urban area and the greater surrounding rural area, and many small cities, towns, and villages fall into this category (Fang et al.,2017).We find that banking competition significantly stimulates regional innovation. This finding remains unchanged after a series of robustness tests and is more prominent for regions in eastern China and for regions with strong intellectual property protection. In addition, banking competition has a positive effect on invention innovation, utility model innovation, and design innovation. Furthermore, we find that banking competition promotes regional innovation by increasing the supply of credit. Our research findings support the view that banking competition promotes innovation. To stimulate regional innovation, the government can consider deregulating bank control and strengthening intellectual property protection.