BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 11/2015:
Banking structure, marketization and small business development: Regional evidence from China
Iftekhar Hasan ()
, Nada Kobeissi ()
, Haizhi Wang ()
and Mingming Zhou ()
Abstract: This paper provides an empirical examination of the
regional banking structures in China and their effects on entrepreneurial
activity. Using a panel of 27 provinces and four directly controlled
municipalities from 1997 through 2008, we find that the presence of large
banking institutions negatively correlates with small business development
in local markets and that this negative relation is driven mainly by
participation of large banks in the short-term loan market. Rural banking
institutions, in contrast, are found to promote regional entrepreneurial
activity. Moreover, large state banks facilitate small business development
in concentrated markets. When we interact measures of banking financing by
state banks and rural banking institutions with a set of provincial level
marketization indexes, we find that extensive marketization, factor market
development, and sophistication of legal frameworks mitigate the negative
effect of large state banks on small business development. In provinces
with advanced market development, efficient factor markets, and favorable
institutional settings, the positive effect of rural banking institutions
on small business growth is even stronger. Finally, we present evidence
that banks do a better job of promoting regional entrepreneurship when it
occurs in conjunction with policies to foster innovation activity and
assure protection of intellectual property rights.
Keywords: banking structure; marketization; small business development; China; (follow links to similar papers)
JEL-Codes: G21; O16; P23; P25; (follow links to similar papers)
35 pages, March 27, 2015
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