Digital inclusive finance and urban innovation: Evidence from China

• Published date: 01 May 2022
• Author: Jingrong Li,Bowen Li
• Date: 01 May 2022
• DOI: http://doi.org/10.1111/rode.12846

1010 

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     wileyonlinelibrary.com/journal/rode  Rev Dev Econ. 2022;26:1010–1034.

© 2021 John Wiley & Sons Ltd

Received: 27 July 2021 

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  Revised: 24 October 2021 

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  Accepted: 2 November 2021

DOI: 10.1111/rode.12846  

REGULAR ARTICLE

Digital inclusive finance and urban innovation:

Evidence from China

JingrongLi

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BowenLi

Institute for Economic and Social 

Research, Jinan University, Guangzhou, 

China

Correspondence

Bowen Li, Institute for Economic and 

Social Research, Jinan University, 

601 West Huangpu Road, Guangzhou 

510632, China.

Email: bowenli@126.com

Abstract

Previous studies  are not  unanimous on  the effect  of fi-

nancial  development  on  innovation.  Digital  inclusive 

finance is one mode of financial development, so its im-

pact on urban innovation needs to be further tested. To 

develop  digital  inclusive  finance,  China  implemented 

the  Plan  for  Promoting  the  Development  of  Inclusive 

Finance (2016– 2020) and the G20 High- Level Principles 

on Digital Inclusive Finance in 2016. We take the imple-

mentation of the Plan and  Principles as a quasi- natural 

experiment and  use the  difference- in- difference  model 

to  estimate  the  pure  effect  of  digital  inclusive  finance 

on urban innovation. The results show that implement-

ing the Plan and  Principles can increase the  number of 

urban patents  by 5.3%,  indicating that  digital inclusive 

finance has a positive effect on urban innovation. In ad-

dition, we find that digital inclusive finance can promote 

urban innovation by improving the  allocation of  credit 

resources, consumption, and industrial upgrading.

KEYWORDS

digital inclusive finance, influence mechanism, policy 

evaluation, urban innovation

JEL CLASSIFICATION

O18; O32; P25; R51

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1011

LI and LI

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INTRODUCTION

According to  the  neoclassical  economic  growth  theory,  technological  progress  is  an  essential 

factor in economic growth (Romer,2018), and innovation is  an important driving force of  tech-

nological progress. As China  enters the  stage of  economic restructuring, problems such  as the 

disappearance of demographic dividends, tighter environmental constraints, and lack of impetus 

for innovation  are  becoming increasingly  prominent.  At the same  time,  China's economy  has 

shifted from a stage of high- speed growth to a  stage of  high- quality  growth, so  innovation has 

become the core driving force for the quality of China's economic growth.

Most studies show that financial development may facilitate innovation activities by alleviat-

ing credit constraints on  the flow of  capital to the most productive projects  and hence promote 

R&D financing and growth (Amore etal.,2013; Brown etal.,2009; Chowdhury & Maung,2012; 

Gorodnichenko & Schnitzer,2013; Hsu et al.,2014; King  & Levine,1993). Innovation activities 

require a  large  amount  of capital  investment,  and  it  is  often  difficult  for  endogenous financ-

ing to meet  the funding  needs of  innovation. Financing  constraints have become  a “stumbling 

block” for enterprises’  innovation activities. In  addition, compared with  other investment proj-

ects, innovation projects have the characteristics of high R&D investment, high risk, long return 

period, and high uncertainty, which leads to serious information asymmetry problems in financ-

ing. So  enterprises’ innovation activities are more susceptible to  external financing  constraints 

(Hall,2002).  Some of the existing  literature has  argued that  traditional  financial development 

can promote enterprise innovation from the macro and micro perspectives (Acharya & Xu,2017; 

Brown etal.,2009). However, many small and medium- sized enterprises (SMEs) have relatively 

high credit risks, and the collateral they can provide is limited. Traditional financial institutions 

often refuse to issue  loans to SMEs (Armendáriz & Morduch,2010).  Inclusive finance can help 

alleviate SMEs’ problems of  limited financing channels  and high financing costs,  providing en-

terprises with ample cash flow (Khurana etal.,2006). The United Nations first put forward inclu-

sive finance in 2005. Inclusive finance emphasizes enabling SMEs and people on low incomes in 

poor areas to obtain reasonably priced  and convenient financial services through strengthening 

policy support and improving market mechanisms.

However, China is a socialist country, so the state- owned economy occupies a dominant posi-

tion. In 2020, the total output of China's state- owned and state- controlled enterprises accounted 

for  62.29%  of  gross  domestic  product  (GDP).  In  order  to  maintain  stable  economic  growth, 

banks  are  more inclined  to  allocate  credit  resources  to  China's  state- owned  enterprises  (Chu 

& Song,2015; Cull & Xu,2003).  SMEs that are more  likely to have innovative activities  may be 

subject to  credit rationing  from banks  (Chong  etal., 2013). In  addition,  China is  a developing 

country, so the development  of  financial  markets is  relatively  backward. The  sustainability  of 

traditional inclusive finance is still a difficult problem to solve. Due to low profits, asymmetric in-

formation, and high transaction costs, formal financial institutions may still exclude low- income 

groups and SMEs (Armendáriz  & Morduch,2010). In recent years, with the rapid  development 

of communication technology and e- commerce, China's Internet finance has developed rapidly. 

Unlike traditional inclusive finance, Internet  finance does not rely on physical outlets. Internet 

finance has greater geographical penetration and low- cost advantages. Digital inclusive finance is 

a new financial service model that combines traditional inclusive finance and Internet informa-

tion technology. In theory, compared with traditional inclusive finance, digital inclusive finance 

has the  following  advantages.  First, digital  inclusive  finance  can broaden  financing  channels. 

Digital inclusive finance uses the Internet and  mobile communications to provide financial ser-

vices and has developed many Internet development platforms and products, such as P2P online