Digital financial inclusion and corporate investment efficiency: Evidence from small‐ and medium‐sized enterprises in China

• Published date: 01 August 2024
• Author: Yong Ma,Yiqing Jiang
• Date: 01 August 2024
• DOI: http://doi.org/10.1111/rode.13089

REGULAR ARTICLE

Digital financial inclusion and corporate

investment efficiency: Evidence from small-

and medium-sized enterprises in China

Yong Ma

1

| Yiqing Jiang

2

1

China Financial Policy Research Center,

School of Finance, Renmin University of

China, Beijing, China

2

School of Finance, Renmin University of

China, Beijing, China

Correspondence

Yong Ma, School of Finance, Renmin

University of China, No. 59 Zhong Guan

Cun Street, Haidian District, Beijing

100872, China.

Email: mayong19828@hotmail.com;

mayongmail@ruc.edu.cn

Abstract

This study investigates the influence of digital financial

inclusion (DFI) on the investment efficiency of small-

and medium-sized enterprises (SMEs) in China.

Employing a dataset of listed National Equities

Exchange and Quotations firms over the period from

2011 to 2020, we find robust evidence that the develop-

ment of DFI improves the investment efficiency of

underinvested SMEs. However, no such effect is

observed for overinvested SMEs. The mechanism anal-

ysis indicates that DFI can mitigate the underinvest-

ment problem of SMEs by restraining their risk-taking

behaviors and easing their financial constraints. Fur-

thermore, we find that the positive effect of DFI on

underinvestment is more pronounced for SMEs with

weaker financial statuses or in less competitive

industries.

KEYWORDS

corporate investment efficiency, digital financial inclusion,

underinvestment

JEL CLASSIFICATION

D21, G20, G31, G32

1|INTRODUCTION

Small- and medium-sized enterprises (SMEs) are well-documented in the literature as the back-

bone of a country's economic growth due to their significant role in job creation, investment

Received: 4 September 2022 Revised: 24 November 2023 Accepted: 9 January 2024

DOI: 10.1111/rode.13089

Rev Dev Econ. 2024;28:929–957. wileyonlinelibrary.com/journal/rode © 2024 John Wiley & Sons Ltd. 929

promotion, and innovation cultivation (Ayyagari et al., 2007; Jutla et al., 2002). This is particu-

larly evident in the case of China. According to the National Bureau of Statistics of China, SMEs

constitute 99.8% of all enterprises in the country and have contributed to approximately 80% of

national employment in recent years. Despite their crucial economic role, SMEs in China have

long been excluded from financial services provided by external lenders, facing the challenge of

financing deficiency. Financial constraints hinder SMEs from making sufficient investments,

impairing their macroeconomic functions and leading to economic downturns. This, in turn,

exacerbates the financing environment for SMEs, creating a vicious cycle of inefficiency that

poses a threat to their survival.

The financing challenges faced by SMEs are a global issue due to their inherent characteris-

tics. Positioned at the end of the industry chain, most SMEs grapple with intense competition

and meager profits, limiting their capability to defend against risks and necessitating external

funds for developmental needs. However, compared with large enterprises, SMEs disclose lim-

ited and unstandardized financial information, often lacking a formal audit report (Berger &

Udell, 2006). This information opacity obliges SMEs to provide collateral when accessing exter-

nal funds, although they often lack ample collateral assets. Another problem faced by SMEs is

their financing costs. The financing requirements of SMEs, characterized by small scale, high

frequency, and urgent timing, are uneconomical for external lenders. In addition, to gain a pre-

cise understanding of SMEs' credit and risk profiles, external lenders must conduct thorough

due diligence in advance, increasing their costs of lending. Given the relatively low value of

self-owned capital and goodwill, SMEs are more prone to default and go bankrupt to avoid debt

repayments, which forces external lenders to invest more in post-monitoring. In summary, due

to the high risk and high cost associated with lending to SMEs, external lenders are cautious

and even reluctant to provide funds, resulting in financing challenges for SMEs. Furthermore,

given the expensive costs of setting up new branches, financial institutions such as banks are

usually located in areas with high population and commerce densities, limiting access to finan-

cial services for SMEs in remote areas.

In addition to the common factors mentioned above, China's financial system also contrib-

utes to the financing challenges faced by Chinese SMEs. Similar to Germany and Japan, China

has a bank-based financial system, with bank lending being the primary financing source for

Chinese SMEs. Meanwhile, China's banking system is also highly stratified, with large nation-

wide banks dominating the credit market and local banks scattered throughout the country. Due

to their market power, large nationwide banks often exhibit “scale discrimination”and “owner-

ship discrimination”in credit rationing. In particular, they prefer to provide a major portion of

their loans to large or state-owned enterprises, making it hard for privately owned SMEs to

obtain funds from these banks. According to the studies of DeYoung (2002) and Lu et al. (2022),

small local banks are more competitive in lending to SMEs since they are geographically closer

and maintain continuous contact with SMEs. However, some local banks aiming to expand their

scales have engaged in cross-regional operations in recent years, paying less attention to esta-

blishing long-term relationships with local SMEs and thus failing to meet the financing needs of

SMEs. In addition, the loan procedures of Chinese banks are usually complex and inflexible,

leading to extended processing time for SMEs to obtain loans. As for direct financing, China's

equity and bond markets are, in general, inadequate to effectively satisfy SMEs' funding require-

ments, given their relatively early stage of development. Although there are several stock trading

platforms for SMEs, the vast majority of SMEs are not qualified to raise funds on these platforms.

Furthermore, compared with their larger or state-owned counterparts, SMEs have a relatively

low credit level, which prevents them from issuing corporate bonds in the bond market.

930 MA and JIANG