Does Bank Competition Promote Corporate Green Innovation? Evidence from the Location of Bank Branches

• Published date: 01 March 2022
• Author: Yufeng Xia,Peisen Liu
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/cwe.12411

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 84–116, Vol. 30, No. 2, 2022

84

*Yufeng Xia (joint corresponding author), Lecturer, School of Economics, Chongqing Technology and

Business University, China. Email: xiayufeng@cqu.edu.cn; Peisen Liu (corresponding author), Lecturer, College

of Economics and Management, Southwest University, China. Email: 20120102011t@cqu.edu.cn. This research

is supported by the Chongqing Technology and Business University High-level Talent Project (No. 2155048),

the Humanities and Social Science Project of Ministry of Education of China (No. 20YJC790079), Chongqing

Social Science Planning Project (No. 2021NDQN38), and the Research of National Science Fund Projects

(No. 20CGL050). The authors are grateful to the two anonymous reviewers for their insightful comments and

suggestions, which greatly helped improve the quality of this paper.

Does Bank Competition Promote Corporate

Green Innovation? Evidence from the

Location of Bank Branches

Yufeng Xia, Peisen Liu*

Abstract

Based on the geographic coordinates of bank branches and fi rms, this study analyzes the

impact of fi rm-level bank competition on corporate green innovation and its underlying

mechanisms. The findings of this study are mainly as follows. First, bank competition

promotes corporate green innovation by reducing transaction costs, increasing the

possibility and quantity of firms applying for green patents. Second, bank competition

increases the share of green innovation while reducing the share of nongreen innovation.

Third, environmental regulation strengthens the promotion effect of bank competition on

corporate green innovation, and the strengthening effect is greatest when environmental

regulation is between its 50th and 75th quantile. The proportion of state-owned banks

weakens the promotion effect of bank competition on corporate green innovation. This

paper is helpful to understand the impact of the banking system on sustainable economic

development.

Keywords: bank competition, environmental regulation, financing costs, geographic

distribution, green innovation

JEL codes: D43, G21, O31, Q56

I. Introduction

Along with the rapid development of China’s economy, the country has begun to attach

more importance to environmental issues. An essential requirement for development that

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Bank Competition and Corporate Green Innovation85

does not pollute the environment is technological and environmental innovation, which is

conducive to reducing the release of harmful substances and decreasing the use of natural

resources throughout the whole production process. More than 90 percent of air pollution

and more than 50 percent of river pollution in China are caused by industrial enterprises.

Industrial enterprises have strong innovative potential (Borghesi et al., 2015). It is

therefore vital to investigate the determinants of green innovation in industrial enterprises.

Previous research has explored the factors infl uencing fi rms’ green innovation, such as

corporate governance (Amore and Bennedsen, 2016), government subsidies (Bai et al., 2019),

environmental disclosure (Xiang et al., 2020), and environmental regulation (Kesidou

and Wu, 2020). However, few studies have given attention to the impact of external

financing on green innovation. As one of the basic premises of innovation (including

green innovation) is stable external financing support, it is important to investigate the

role of external financing in the generation of green innovation. Cuerva et al. (2014)

found that financial constraints have no impact on the probability of developing

conventional innovation but have an inhibiting effect on introducing green innovation.

Ghisetti et al. (2016) argued that fi nancial barriers negatively affect green innovation

investment decisions. Nevertheless, they have not linked the credit market environment

further with corporate green innovation.

China’s fi nancial system is dominated by banks and the banking system is mainly

dominated by large state-owned banks (SOBs) (Allen et al., 2012). According to the

statistics of the People’s Bank of China, in 2010, banks provided 72.46 percent of

the total capital raised by enterprises, while the bond market provided 5.91 percent of

that. Although the proportions become 60.97 percent and 9.53 percent, respectively, in

2021, bank loans are still the main form of external financing for enterprises. China

continued its market-oriented economic transformation, after entering the World Trade

Organization (Hoekman and Wolfe, 2021).1 How effective are these banking reforms?

There are no studies to assess the effects from the perspective of green innovation.

Some literature has investigated the effects of the bank credit market environment

measured as bank competition on firm innovation output (Chava et al., 2013;

Cornaggia et al., 2015; Deng et al., 2020). However, the possible relationship between

bank competition and green innovation has been overlooked. It is noteworthy that green

1In 2003, the China Banking Regulatory Commission (CBRC) was established to supervise and manage banks.

In 2006, the CBRC started to allow foreign banks to conduct business on the Chinese mainland. Foreign banks

could then compete with local Chinese banks. In 2007, the CBRC allowed joint-stock commercial banks to

open new branches in cities or counties with characteristics of economic agglomerations, thus further removed

restrictions on banks. In 2009, the CBRC allowed joint-stock banks to open branches freely in cities where

they already had branches.

Yufeng Xia, Peisen Liu / 84–116, Vol. 30, No. 2, 2022

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

86

innovations are different from traditional ones, and their connotations and features

are new. First, green technological innovation has double externality characteristics

in terms of knowledge spillovers and environmental public goods (Rennings, 2000).

The former is common to innovation (including green and nongreen innovation),

and the latter is specifi c to green innovation. Second, government policies and public

pressures concerning the environment play an important role in promoting green

innovations (Borghesi et al., 2015). Third, compared with traditional innovation, the

technology underlying green innovation is more complex and novel (Petruzzelli et al., 2011);

thus, the returns of investing in green innovation are uncertain. Through a meta-analysis

framework, Horváthová (2010) concludes that the economic returns of improved

environmental performance are positive, while others found that such returns are absent

or even negative. Due to these differences, it is essential to associate the bank credit

market with green innovations, which are different from traditional ones.

This study demonstrates the relationship between bank competition and corporate

green innovation, supplementing relevant research on the determinants of corporate

green innovation from the perspective of the external fi nancing environment. The degree

of bank competition faced by each fi rm is identifi ed using the geographic coordinates

of the fi rm and bank branches. By matching the Annual Surveys of Industrial Enterprise

dataset with China’s State Intellectual Property Offi ce (SIPO) patent database and fi rm-

level bank competition data, this paper analyzes the impact of bank competition on

corporate green innovation and its underlying mechanisms. Considering that corporate

green innovation is more susceptible to government policies, we further examine the

role of government environmental regulation in the linkage between bank competition

and corporate green innovation. Moreover, we investigate how the proportion of SOBs

affects the linkage between bank competition and corporate green innovation.

This paper provides the following main fi ndings. First, bank competition matters to

corporate green innovation and signifi cantly increases the number of fi rms’ green patent

applications. Second, reducing fi nancing costs, and increasing the possibility of green

patents for green innovation entrants and the number of green patent applications for

green innovation incumbents are the channels through which bank competition affects

corporate green innovation. Third, bank competition has a greater promotion effect on

corporate green innovation when the government implements stricter environmental

regulations. Finally, the proportion of SOBs weakens the promotion effect of bank

competition on corporate green innovation.

This study makes several contributions to the literature on green innovation and

bank competition. First, this paper contributes to the measurement of bank competition.

The structural and nonstructural approaches are the primary methods to measure bank